Quiver Quantitative - Federal Reserve Chair, Jerome Powell, hinted at an extension in the pause of interest-rate hikes, given the recent upswing in long-term Treasury yields and continuous progress in inflation. Speaking in New York, Powell's perspective aligns with other colleagues, suggesting the possibility of maintaining short-term interest rates at the upcoming meeting. The surge in long-term rates, with yields on the 10-year Treasury note nearing 5%, could naturally temper the economy's pace, possibly offsetting the need for another immediate Fed rate increment.
Higher long-term rates impact a spectrum of borrowing costs, spanning mortgages, auto loans, and business debt. Recent rates quoted by U.S. mortgage lenders for the 30-year fixed-rate loan hovered around 8%, a threshold not seen since 2000. Addressing the recent spike in borrowing costs, Powell postulated that it might reduce the necessity for subsequent Fed hikes, albeit marginally. He acknowledged the strength of the economy, but his remarks showcased a greater comfort level with the Fed’s current policy, implying a higher threshold for further rate hikes.
Despite buoyant economic data, including a robust September employment report and a formidable retail-sales report, Powell did not hint at an imminent rate increase. He proposed that perhaps rates haven't sustained their elevation long enough to produce the desired economic effects. Current economic indicators present a conundrum for the Fed. While the economy remains resilient, countering forecasts of a slowdown, inflation has seen a decline. Powell noted that based on the Fed's preferred inflation metric, core prices probably rose by 3.7% in September, a drop from previous months, and still above the Fed's 2% inflation target.
The trajectory of consumer spending will play a pivotal role in future economic outcomes, influencing employment and inflation. Powell highlighted that wage growth seems to be decelerating, aligning more with the Fed's objectives. Over the past 20 months, interest rates have witnessed a rapid ascent to counter soaring inflation. Powell cautioned that the rapid pace of tightening might still have residual impacts in the pipeline. The 10-year Treasury yield's surge post the Fed's last rate increment in July signifies a marked shift in market dynamics, with several factors contributing to the trend.
This article was originally published on Quiver Quantitative