During a recent talk at the Economic Club of New York, Federal Reserve Chair Jerome Powell hinted that the increasing bond yields could potentially lead to a pause in the Fed's rate hikes. This rise in bond yields may have a moderating effect on the economy, potentially helping to reduce inflation rates.
Powell acknowledged the ongoing efforts to control inflation, but he emphasized that the Fed's future actions would be contingent on the economy's performance in the coming months. Notably, the 10-year Treasury yield is approaching the 5% mark, a level not seen since 2007.
The increase in Treasury yields comes from expectations that the Fed will keep rates higher for a longer time, which could slow down the economy. A rate hike might still happen in December if the economy keeps growing strongly and inflation doesn’t drop as hoped. However, Powell seems to agree that a pause in rate hikes is more likely in November.
The Federal Reserve is working carefully to find a balance. They don't want to raise rates too much and cause more people to lose jobs or harm the economy, but they also want to make sure they're doing enough to keep inflation in check. Financial markets are expecting the Fed to pause the rate hikes in the upcoming October 31-November 1 meeting, with a lesser chance of another pause in December.
US inflation has slowed down a lot from its peak last summer, thanks to the Fed’s aggressive rate hikes. However, officials aren’t celebrating yet as inflation is still higher than the Fed’s 2% target.
The job market is strong with 336,000 jobs added in September, and the unemployment rate remains low at 3.8%. But there are concerns like the resumption of student loan payments, ongoing labor strikes, and the rising Treasury yields. Powell also mentioned the recent conflict between Israel and Hamas as a potential threat to the global economy, especially if it affects energy markets in the Middle East.
During Powell's speech, he faced an unexpected interruption from climate activists belonging to a group named Climate Defiance. These activists oppose fossil fuel extraction on federal lands and waters. After a short pause, the discussion resumed, with Powell highlighting the Federal Reserve's commitment to a balanced approach in handling inflation and promoting economic growth.
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