Recent bond yield increases have shifted the likelihood of an interest-rate hike off the table for the November policy meeting of the Federal Reserve. Moreover, it appears that a rate hike may also be unlikely at the December meeting.

Federal Reserve Chairman, Jerome Powell, made this clear during a speech at the Economic Club of New York. In his prepared remarks, Powell emphasized that the economy is already approaching price stability. He also mentioned that delays in monetary policy and rising geopolitical uncertainty are prompting the Fed to approach future actions with caution.

Gregory Daco, Chief Economist at EY, further confirms that the Fed is not eager to tighten monetary policy any further. He believes that a rate hike in November can be ruled out with confidence.

The market seems to agree with this sentiment. Following Powell's speech, the CME FedWatch Tool showed a 99% probability that the Fed would maintain the target rate between 5.25% and 5.5%.

During a question-and-answer session moderated by David Westin of Bloomberg Wall Street Week, Powell acknowledged that rising bond yields have tightened financial conditions. Specifically, the 10-Year Treasury yield reached its highest level since July 2007 after Powell's remarks.

Increasing bond yields affect various financial aspects, including interest rates on loans, corporate bonds, and mortgage-backed securities.

When asked about the reasons behind rising bond yields, Powell pointed to several possibilities. He stated that if yields are increasing due to "endogenous" factors or expectations of further rate hikes from the Fed, financial conditions would ease if the Fed decided against raising rates.

However, Powell also mentioned other factors that could be contributing to this phenomenon. He highlighted concerns about fiscal deficits and a potential "change in correlation between stocks and bonds." According to him, these other factors seem to be playing a more significant role in driving up yields rather than expectations of the Fed's actions.

This suggests that the recent tightening could persist for a while longer.

Fed Chair Powell Suggests Continued Tightening of Monetary Policy amidst Rising Bond Yields

According to Federal Reserve Chair Jerome Powell, the recent surge in bond yields has amounted to a tightening of financial conditions. During a recent interview, Powell acknowledged that higher bond rates are currently driving tighter financial conditions, which aligns with the overall objective of monetary policy.

His comments came in response to questions about whether the bond market's upward trajectory was effectively taking on the role of tightening financial conditions for the central bank. San Francisco Fed President Mary Daly had previously stated in early October that the bond-market tightening observed at that point was already comparable to a rate hike.

Powell emphasized that the intended purpose of tightening policy is to impact financial conditions. As bond yields continue to rise, they are contributing to the desired effect of gradually tightening monetary policy. However, Powell refrained from making definitive statements about the future direction of monetary policy. He acknowledged that the recent arithmetic surrounding rising bond yields could influence the Fed's motivation to raise rates further, but added that this remains to be seen.

Moreover, Powell stated that he does not endorse any specific level of longer-term rates, suggesting that such rates will be determined more by investors. While he did not provide explicit details about the exact course of monetary policy, his remarks indicate that the default action will likely involve further firming rather than loosening.

Peter Williams, a global macro strategist and economist at 22V Research, noted that Powell's comments implied a predisposition towards a hawkish approach in the medium-term. Williams highlighted Powell's statement that monetary policy is not excessively tight at present as an indication that the Fed is unlikely to consider rate cuts in the near future.

In conclusion, while Powell did not provide a detailed roadmap for monetary policy, he emphasized the importance of ongoing tightening and acknowledged the impact of rising bond yields on financial conditions. These remarks suggest a continuation of the current trend towards tighter monetary policy, with little inclination towards rate cuts in the near term.

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