Two central bank officials temporarily embraced bond yields

NEW YORK, Aug 24 (Reuters) – Two Federal Reserve officials on Thursday tentatively welcomed a rise in bond market yields as something that could complete the U.S. central bank’s task of slowing the economy and returning inflation to the 2% target. They see a good chance that no further interest rate hikes will be needed.

The policymakers — Philadelphia Fed President Patrick Harger and Boston Fed President Susan Collins — spoke in separate interviews as central bankers and other economic leaders gathered in Jackson Hole, Wyoming, for an annual symposium. As they lay out their outlook on monetary policy and the economy, Harker and Collins attribute what a jump in bond yields is to the central bank’s work to slow economic activity to reduce inflation.

The increase in long-term borrowing costs “is helping to cool the economy,” Harger said in an interview with CNBC. Jumping isn’t a big concern, he said, but he’s keeping an eye out.

Meanwhile, Collins said on Yahoo Finance’s video channel that the rise in yields “fits perfectly” with the broader story surrounding the economy and monetary policy. For the Fed’s part, “I think it would be useful to have higher long rates consistent with the understanding that this will take some time to get inflation back to the 2% target.”

Harger and Collins spoke ahead of the formal start of the Kansas City Fed’s Jackson Hole conference, which will feature a hotly anticipated speech on the economic outlook by Federal Reserve Chairman Jerome Powell at 10:05 EDT (1405 GMT) on Friday.

The central bank, which has been aggressively raising short-term rates since March 2022 to curb the worst surge in inflation in decades, raised its benchmark overnight interest rate to a range of 5.25%-5.50% at its policy meeting last month. Fed officials continue to believe that inflation is too high, while its moderation has opened the door to the end of the rate-hike cycle. Financial markets are now skeptical that the US Federal Reserve will raise rates again at its September 19-20 meeting.

The question of the need for higher rate hikes is largely driven by the resilience of financial markets and the broader economy in the face of aggressively more restrictive monetary policy. Amid rate hikes that have pushed the central bank’s policy rate above five percent, the unemployment rate remains historically low and economic growth remains strong, even as sectors such as housing have been hit hard by high borrowing costs.

The state of the economy has suggested that the central bank may need to do more with fiscal policy, while rising long-term borrowing costs are limiting activity, which will take some pressure off the central bank.

The yield on the benchmark 10-year Treasury note rose to around 3.84% at the start of 2023, and although moves have been brisk, it has risen markedly since mid-July. About 4.23% in Thursday afternoon trading.

“If rates remain at current levels, this would provide substantial additional restraint compared to conditions that prevailed during the last Fed meeting in July, and this additional restraint will continue, peaking at the end of 2024,” analysts said. Evercore ISI said in a research note on Wednesday. They said this tightening “appears to be sufficient – ​​indeed more than sufficient – ​​to offset the recent upside surprise in growth without the need for a central bank rate response.”

Hold steady?

In their interviews Thursday, Harker and Collins leaned against the need for further increases.

“I think we’ve done enough right now” and it’s good to be consistent throughout the year and see how that affects the economy, Harker said. “Are we in a restrictive position, and should we be more restrictive?” he added.

For Harker, it’s a question of the economy working through the current impact of the central bank’s earlier tightening. “What I heard loud and clear through my summer travels was, ‘Please, you’ve moved up too fast. We need to absorb that,'” he said of his local connections. Harker also noted that bank credit conditions are tightening, creating more control over the overall economy.

Collins left the door open for further action, but did not call for it.

“We may be close, we may even be where we are” and not raise rates, Collins said. “But certainly additional increases are possible, and we have to take a full look and be patient now and not try to get ahead of what the data will tell us when it comes out,” he said.

Harker sees inflation at 4% this year and 3% next year, reaching the Fed’s 2% target in 2025, and expects the unemployment rate to rise to 4% or higher from 3.5% in July. He believes that economic growth should be moderate.

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