Higher US Treasury Yields Hurt Further Rate Hike Odds from the FED
Yields have decreased since the weekend due to tragic events in Israel, prompting a move to US Treasuries as investors seek safer assets. Recent remarks by Federal Reserve officials, including Fed Vice Chair Jefferson and Dallas Fed President Logan, suggest unease with the rapid ascent in US yields. There is a perception that this unease may make the Fed hesitant to implement another rate hike in the near term.
The surge in US yields, if sustained, may discourage the Federal Reserve from proceeding with its planned final rate hike for the year. This has put downward pressure on the US dollar. Fed Vice Chair Jefferson’s comments indicate a more cautious stance, emphasizing the need to consider the implications of higher bond yields on future policy adjustments. This cautious tone suggests that an immediate rate hike in the upcoming month is unlikely.
Logan provided an in-depth examination of the recent increase in US bond yields, highlighting the “substantial” financial tightening and exploring factors driving the surge. She believes that the term premium has played a pivotal role in the yield surge since July and that a persistent elevated term premium could reduce the necessity for further policy tightening via rate increases.
The observations align with MUFG’s perspective that the Fed’s policy trajectory is at a standstill. There is a potential for rate reductions next year in response to a decelerating pace of growth and inflation. So there is a noticeable shift in the Federal Reserve’s tone, expressing heightened concern over the rapid increase in US yields. If this sentiment persists, it could have significant implications for the future direction of US monetary policy and broader financial markets.
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