Powell says higher bond yields are producing tighter financial conditions

Fed Chair Powell hints that soaring bond yields could mean end of rate hikes

By Ahmed Azzam | @3zzamous | 20 October 2023

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  • Powell leans towards delaying November rate hike due to uncertainties.

  • Rising bond yields and geopolitical risks add complexity to economic outlook.

  • PBOC bolsters China's economy with record cash injection.

  • Japan's inflation rate falls to 3.0%, lowest since September 2022.

Equity markets experienced a tumultuous day as rising tensions in the Middle East sent shockwaves through the global financial landscape. Amid this increased volatility, the commodities market saw oil and gold prices surge to new heights, prompting investors and traders to closely monitor the situation. Simultaneously, the bond market saw a resurgence in demand for Treasuries, indicating a flight to safety.

Powell's forward guidance

Federal Reserve Chair Jerome Powell made a significant statement that reverberated across financial circles, as he signaled that a November interest rate hike is increasingly unlikely. Powell emphasized the central bank's commitment to cautious and measured decision-making in the face of mounting economic uncertainties. While a rate hike remains on the table, Powell stressed that "the evidence is not that policy is too tight right now."

Rising bond yields and geopolitical risks

Chair Powell further acknowledged the challenges posed by rising bond yields, emphasizing their role in tightening financial conditions. In a world where even slight adjustments can have far-reaching consequences, this recognition underscores the Fed's focus on maintaining economic stability. Furthermore, Powell characterized geopolitical risks as "highly elevated," highlighting the potential global impact of escalating international tensions.

Harker's call for caution

Patrick Harker, President of the Federal Reserve Bank of Philadelphia, called for a more measured approach, advocating for a pause in rate hikes despite faster-than-expected economic growth. Harker's perspective reflects the ongoing debate within the Federal Open Market Committee (FOMC) about the appropriate course of monetary policy, demonstrating that a consensus remains elusive.

Lorie Logan's assessment of inflation

Lorie Logan, Executive Vice President of the New York Fed's Markets Group, provided insights into the central bank's ongoing battle against inflation. While acknowledging progress in addressing inflationary pressures, Logan emphasized that she is "not yet convinced" that prices are on a sustained trajectory toward the central bank's 2% target. Her cautionary tone suggests that the Fed remains vigilant in its mission to balance economic growth with price stability. She also noted that higher long-term yields are affording officials more time to carefully assess the state of the economy.

PBOC's supportive measures in China

Meanwhile, the People's Bank of China (PBOC) took steps to bolster its domestic financial system. In an effort to maintain low funding costs and provide support to the economy, the PBOC injected the largest amount of short-term cash into the banking system ever recorded through reverse repurchase contracts. Furthermore, Chinese lenders held the one-year and five-year loan prime rates steady at 3.45% and 4.2%, respectively, indicating a commitment to financial stability amid growing global uncertainties.

Japan's inflation rate retreats

Turning our attention to Japan, data for September 2023 revealed a decrease in the annual inflation rate. In September, inflation in Japan stood at 3.0%, down from 3.2% the previous month. This decline marked the lowest reading since September 2022, signaling potential challenges in the country's quest to reach its inflation targets.