Title: Federal Reserve Indicates Unlikeliness of Rate Hike Amidst Surging Treasury Yields
The recent surge in the 10-year Treasury yield has prompted policymakers at the Federal Reserve to indicate a reduced likelihood of a rate hike on November 1, according to reports from the McCreary County Record. The impact of higher long-term interest rates on financial conditions and the need for rate hikes have been acknowledged by Fed Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan.
Although the 10-year Treasury yield reached a 16-year high, it has since fallen, with speculations pointing to the ongoing conflict between Israel and Hamas as a possible catalyst for the decline. The uncertainty surrounding geopolitical tensions often results in investors seeking safe-haven assets such as Treasury bonds, influencing the yield.
These higher long-term interest rates, however, appear to be curbing consumer spending, with credit card spending at retailers falling by approximately 11% in September. This decline represents an early indication that elevated interest rates are starting to impact consumer behavior.
Furthermore, inflation forecasts indicate that price pressures have eased in recent months. Fed Chair Jerome Powell suggests that six months of tame data are needed to confirm this trend. Wall Street economists are expecting a rise of 0.3% in the core Consumer Price Index (CPI) and overall prices for September, which would lower inflation rates compared to previous months. However, there are concerns about the weight of housing in the CPI, which may not accurately represent consumer outlays, as well as the government’s methodology for tracking rents, which lags behind market prices.
Key inputs for the core Personal Consumption Expenditures (PCE) inflation report, particularly in health care services and airfares, will be provided by the producer price index (PPI).
Alongside the surge in the 10-year Treasury yield, real interest rates have also risen, contributing to tighter financial conditions. Powell attributes this rise to increased supply of treasuries and stronger economic growth.
Overall, the market odds of a rate hike on November 1 and December 13 have decreased, leading to slight gains in the S&P 500. Uncertainty surrounding geopolitical tensions, coupled with signs of curbed consumer spending and easing inflation pressures, have influenced policymakers’ cautious approach towards future rate hikes.
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