DALLAS- Top ranking Federal Reserve officials indicated Monday that rising yields on long-term US Treasury bonds, which directly influence financing costs for households and businesses, could steer the Fed from further increases in its short-term policy rate and substitute the work done by financial markets for formal monetary policy moves by the central bank.
“We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy being too restrictive,” Fed Vice Chair Philip Jefferson said, nodding to the rise in US Treasury yields and the need for the central bank to “proceed carefully” with any further increases in the benchmark federal funds rate.
“I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy,” Jefferson said in remarks to the National Association for Business Economics.
The remarks by Jefferson and earlier by Dallas Fed president Lorie Logan, one of the Fed system’s more influential voices on financial markets, caused investors to undercut the likelihood of further Fed rate increases.
Even though policymakers in a set of projections issued last month said one more increase in the benchmark federal funds rate is likely needed this year, the CME Group’s FedWatch showed the estimated chance of a rate hike at the Fed’s upcoming meeting plummet from around 27 percent at the start of the day to around 14 percent after the two officials spoke. The chance of a rate increase at the December meeting fell from around 36 percent to 24 percent .
“We are getting more and more signals from the different policymakers that the Fed is essentially done with its tightening cycle if conditions remain as tight as they are on the financial front, and if we continue to see the types of slowdown in terms of economic activity that are implicit from this tightening of financial conditions and this tightening of monetary policy,” said E-Y Parthenon’s Gregory Daco, one of the economists in the room where both Jefferson and Logan spoke.
