Since the last Federal Open Market Committee rate decision on September 20, rates markets have sold off very aggressively. And, despite rates being left on hold, the hawkish message, which included the possibility of another hike this year and less cuts next year than previously forecast, was one of the key contributing factors behind the ~55bps increase in the 10-year treasury in the 10 days following that meeting.
However, since peaking at almost 4.9% intraday, the 10-year maturity has seen a significant rally to approximately 4.56% currently. There's little doubt that the increase in geopolitical risks has contributed to investors seeking risk-off protection, but there has also been a plethora of Federal Reserve officials on the tapes, with much more comforting rhetoric for treasury bulls, suggesting that a number of the “dots” that signalled another rate hike may now be less adhered to, or removed altogether.
The San Francisco president, Mary Daly (a non-voting member), was on the tapes overnight, and although she made the point that the nominal neutral rate may have increased from 2.5% to 3%, she emphasised this was only a 50bps increase, not 250bps. She added: “5% is not going to be the new neutral. There’s no evidence that that will be the new neutral — that’s still the policy rate trying to fight back high inflation."
She also notes that the recent surge in bond yields had tightened financial conditions, and that therefore “maybe the Fed doesn’t need to do as much”, adding that action was still be dependent on the data.
These comments followed those from Dallas president, Logan, and Fed vice chair, Jefferson, both voting members, who also acknowledged that higher yields would likely negatively impact the economy. Atlanta president, Bostic (a non-voter), meanwhile, reiterated his view that no further hikes would be needed to take inflation to target levels.
In addition, Governor Bowman, also a voter, and who as recently as early October said that multiple hikes may be needed to calm inflation, also toned down her comments, saying the policy rate may need to rise and stay restrictive. However, she also noted that the tightening of financial conditions needed to be watched and probably allowed the Fed more time to see how economic conditions evolved.
The toning down of the hawkish rhetoric is probably not a surprise – the aggressive move higher in yields is almost certain to have tightened conditions, and when Fed members are asked to comment, they are not going to ignore this development. However, this tightening won't impact economic data immediately, and it remains to be seen how much “patience” the Fed will display. But, given the aggressiveness of the yield move, the probability that the Fed is done hiking has likely increased.