Investing.com – Federal Reserve Chairman Jerome Powell on Thursday said the Fed is "proceeding carefully" on monetary policy decisions following a spike in Treasury yields that have helped tighten financial conditions "significantly," though acknowledged that signs of ongoing economy growth could warrant further policy tightening.
"Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening," Powell said in prepared remarks Thursday for a speech at the Economic Club of New York Luncheon, New York.
Powell's says isn't clear yet whether higher Treasury yields are a substitute for rate hikes
Powell was unwilling to declare whether longer-term Treasury yield could substitute for further rates hikes, saying it could in principle, but it "remains to be seen."
Yet, the main drivers behind the surge in yields on longer-term bonds are important, Powell said, because if bond yields are going just because "they [the market] expect us to do things, so that if we don't do them they'll come right back down."
The Fed chief doesn't believe, however, the Fed's higher for longer stance has been the main driver.
"I don't think it's the case," Powell said, attributing the move higher to various factors including an increase in the supply of Treasuries - that have pressured prices and pushed yields higher - concerns over the U.S. fiscal deficit and the change in correlations between stocks and bonds.
Ongoing economic strength, easing tightness in labor market may force Fed into another hike
Still, above-trend economic growth or signs that tightness in the labor market is no longer easing, could "put further progress on inflation at risk and could warrant further tightening of monetary policy," the Fed chief said.
The most recent measure of core PCE showed a slowing in the pace of inflation to 3.9% in August from 4.3% previously, though that is still well ahead of the Fed’s 2% target.
"Many forecasts calling for the U.S. economy to be in recession this year," Powell said, but "growth is now running for this year above its longer-run trend." "This has been driven largely by consumer spending, driven by a very strong job market," he added.
Yield on 10-year Treasury flirts with 5%; 2-year Treasury yield slips as Fed pause bets rise
The remarks from Powell briefly pushed the 10-year Treasury yield to 4.997% for the first time since 2007, while the 2-year Treasury yield, which is more sensitive to rate hikes, remained in the red amid waning odds of another rate hike this year.
The odds of November rate pause is all but priced in, while the odds of a hike at the December fell to 27% from 37% a day earlier, according to Investing.com's Fed Rate Monitor Tool.