Fed Chair Jerome Powell Suggests Potential Rate Increases Amid Strong U.S. Economy

Fed Chairman Jerome Powell addresses the central bank’s independence and its response to rising interest rates.

In a recent speech at the Economic Club of New York, Federal Reserve Chair Jerome Powell signaled the possibility of additional interest rate increases, citing the U.S. economy’s enduring vigor and the persistently tight labor markets.

U.S. Economic Resilience

Powell emphasized, “We are attentive to recent data showing the resilience of economic growth and demand for labor.” He acknowledged that such robust indicators might necessitate further adjustments in the Federal Reserve’s interest rates.

Market Expectations Challenged

Powell’s remarks diverged from prevailing market expectations, which had hinted at a potential end to the Federal Reserve’s rate hikes. He noted that continued above-average economic growth and unrelenting labor market tightness could jeopardize progress in controlling inflation, compelling the need for additional monetary policy tightening.

In his speech, Powell’s stance indicated that the Federal Reserve remains committed to supporting economic stability and price level objectives. The central bank appears ready to adapt its policies as needed to preserve these dual mandates.

Our Independence Is Not for Times When We’re Popular

Fed Chairman Jerome Powell stated that the central bank’s independence “is not for times when we’re popular.” He noted that home builders have been hit hard in recent weeks by rising interest rates.

Powell Repeats Dovish Argument That the Full Effect of Past Hikes Hasn’t Been Felt Yet

Fed Chairman Jerome Powell reiterates the notion that the full effects of past rate hikes may not have been realized in the economy. This argument is favored by relatively dovish central bankers. Hawks are more skeptical, suggesting the Fed’s policy clarity has reduced “long and variable lags” identified by Milton Friedman.

10-Year Treasury Yield Not Far From 5% After Powell’s Prepared Remarks

Long-dated Treasury yields remain elevated, with the 10- and 30-year rates approaching 16-year highs, as traders assess prepared remarks from Federal Reserve Chair Jerome Powell.

What’s Happening?

• The 2-year Treasury yield fell 4.4 basis points to 5.174% from 5.218% on Wednesday, the highest level since July 5, 2006.
• The 10-year Treasury yield rose 1.6 basis points to 4.918% from 4.902% Wednesday afternoon, the highest since July 25, 2007.
• The 30-year Treasury yield advanced 3.4 basis points to 5.027% from 4.993% late Wednesday, the highest since Aug. 17, 2007.

What’s Driving Markets?

The 10-year Treasury yield, just below 5%, is at its highest since 2007. Investors are selling long-dated U.S. government debt due to fears that robust economic data. Thus, may lead the Federal Reserve to maintain higher interest rates to combat inflation.

Data released on Thursday shows initial jobless claims falling to a nine-month low of 198,000 last week, contrary to expectations of rising layoffs amid higher U.S. interest rates. The Philadelphia Fed’s manufacturing gauge remains in contractionary territory for the second straight month in October.

Jerome Powell’s prepared remarks indicate the central bank’s attentiveness to recent economic data, suggesting more rate hikes may be needed if economic growth and labor demand persist.

There are concerns that important buyers of Washington’s debt, such as Chinese investors, have been selling U.S. assets at the fastest pace in four years.

Markets Priced in Fed’s Likely Inaction on Interest Rates

Markets have priced in a 98% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Nov. 1. A 25-basis-point rate hike to a range of 5.5%-5.75% by December is seen at 35.8%.

What Analysts Are Saying?

Ten-year yields “are at the precipice of a 5-handle,” according to BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. The spike above 5% may be long overdue for some, but not a welcome development for equity investors.

Conclusion

Federal Reserve Chair Jerome Powell’s comments on potential rate increases in response to the robust U.S. economy suggest that the central bank remains vigilant and flexible in its approach to monetary policy. Thus, the market, it seems, may need to adjust its expectations in light of the Federal Reserve’s commitment to maintaining a balanced economic outlook.

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Disclaimer: Please note that this article serves solely for informational purposes. As such, it is not financial advice. We strongly advise readers to conduct thorough research and consult with financial professionals before making any investment decisions.