Fed’s Cook Remarks on Rising Yields and Monetary Policy Outlook – Reuters

By Howard Schneider

WASHINGTON – Federal Reserve Governor Lisa Cook stated on Monday that the recent increase in long-term U.S. bond yields does not appear to stem from investor expectations of further interest rate hikes. This distinction is crucial in how these market rates are evaluated within the central bank.

Yield changes based on anticipated actions from the Fed would pose challenges for officials to implement. In contrast, yields that are influenced by other factors could tighten financial conditions, thereby helping to reduce demand and inflation without additional measures from the Fed.

"Decompositions between changes in expected rates and term premiums depend on the specific models and assumptions used," Cook remarked in prepared comments for a Duke University event. "However, it seems that an expectation of higher near-term policy rates is not driving the increase in longer-term rates."

The interest rate on the 10-year Treasury bond has climbed approximately one percentage point since summer, surpassing 5% late last month before recently retreating to around 4.64%. The Fed has maintained its policy rate since July.

Cook refrained from sharing her personal views on the Fed’s policy rate, choosing instead to address broader financial stability issues.

Last week, the U.S. central bank opted to keep interest rates unchanged. Fed Chair Jerome Powell noted that increased market-based interest rates might have the same effect on curbing inflation as hikes in the central bank’s policy rate, provided these rates remain sustained and are not contingent on further Fed action.

In her assessment of financial stability, Cook expressed confidence that the banking system has withstood the strains experienced last spring and is "sound and resilient overall."

She indicated that both households and corporations generally appear to be in strong financial positions, although some stresses may be surfacing among those with lower credit ratings, as expected in a higher interest rate environment.

However, Cook acknowledged the potential risk of a sharp decline in commercial real estate prices if delinquencies on commercial mortgages increase, which could pressure owners to sell. She noted that office demand "has remained weak" following the COVID-19 pandemic.

Additionally, Cook mentioned that she is keeping an eye on various risks associated with non-bank financial institutions, including possible vulnerabilities among highly leveraged hedge funds engaged in Treasury securities trading, which could expose them to funding shocks.