Fed Members Push Back Against Bets That Hiking Cycle is Over; Powell in Focus

Investing.com – Federal Reserve officials on Tuesday tempered expectations that the current cycle of interest rate hikes is over, setting the stage for Fed Chairman Jerome Powell to potentially affirm a more hawkish stance against recent relaxation in financial conditions.

Rate Hikes Still Possible

Federal Reserve Governor Michelle Bowman was among several officials who emphasized to market participants that assumptions about the Fed no longer raising rates were premature.

"I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation to 2% in a timely way," Bowman stated on Tuesday.

Meanwhile, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, acknowledged the recent progress on inflation but noted in an interview that reducing inflation is "the No. 1 thing."

Treasury Yields and Financial Conditions

These comments renewed interest among investors regarding the possibility of an additional rate hike. However, many still believe that the Fed’s hiking cycle has come to an end, leading Treasury yields to struggle following the Fed’s decision to maintain rates unchanged last week, alongside Powell’s dovish press conference.

"Powell’s dovish tone—downplaying the recent strong economic data—suggests that the threshold for further hikes remains high, which indicates we may be at the end of the rate hikes," Nomura commented in a note before Powell’s scheduled remarks.

The chances of a rate hike during the December and January meetings are currently low, estimated at 10% and 15%, respectively.

Will Powell Provide Pushback?

The main theme from Fed officials regarding whether rising Treasury yields would aid in their goal to reduce inflation has been to clarify the reasons behind the increase in rates.

If the rise in Treasury yields is largely influenced by expectations of future Fed actions, it is unlikely to impact the Fed’s policy decisions moving forward.

"The recent increases in longer-term rates cannot solely be seen as a direct reaction to expected policy changes from us," Powell said. "If we decided not to follow through, then those rates would likely decrease," he added.

However, this situation appears to be developing. Powell’s dovish stance seems to be contributing to lower U.S. bond yields, alleviating market concerns of a hard economic landing in the future, as noted by Nomura.

The yield on the benchmark bond fell by 9 basis points to 4.569%, drifting further from the 5.021% cycle high seen last month, while another key yield dropped by 10 basis points to 4.727%.

This somewhat hawkish response from Fed officials comes amid concerns that continued loosening of financial conditions could complicate the Fed’s efforts to control inflation.

Powell will have the opportunity to clarify his recent comments, which seemed to encourage the easing of financial conditions. He is expected to speak at the Federal Reserve Division of Research and Statistics Centennial Conference at 9:15 ET on Wednesday and will participate in a panel discussion at 2 PM on Thursday.