Fed Speakers Maintain Hawkish Stance Amidst Market Uncertainty

The latest Fed speakers have given some hawkish pushback

One of the questions after the rebound of Treasuries with 10yr yields rallying towards close to 4.5% was how the Federal Reserve would react having only just begun to point out that higher longer rates could be doing part of its job by tightening financial conditions. Markets had taken this at least in part as a reason to trim expectations of further Fed hikes.

Some speakers such as the Minneapolis Fed’s Neel Kashkari have been quite direct in saying that the rate cycle may not be over, and he would still prefer to err on the side of overtightening. Hawkish Governor Michelle Bowman expects further rate increases. While acknowledging the tightening impact of higher long-end rates, she pointed out their recent retracement and volatility, calling for more time to assess their impact. The Dallas Fed's Lorie Logan is also keeping an eye on market yields but stressed the Fed should always stay focused on inflation, which to her looks more like it's trending to 3% and not 2%, and in particular also be sensitive to inflation expectations. This all resonates with the Fed chair’s earlier emphasis that changes in financial conditions have to be persistent in order to have policy implications. 

Not all Fed speakers have ventured into directly commenting on monetary policy. But even then Fed Governor Christopher Waller still alluded to the overall rise in yields since the summer, meaning even after the rally, the move amounts to a notable tightening of financial conditions. And to be fair, while Treasury yields have been volatile, the adjustment in associated rates such as mortgage rates, which remain at record highs, will be slower.

 

Today's events an market view

The data calendar remains relatively light. The focus in EUR rates will be on the retail sales data and a little earlier on the European Central Bank consumer survey’s inflation expectations with Isabel Schnabel having pointed out the fragility of expectations as a reason to remain cautious.

It is again the central bank speakers' schedule that is busier, both in Europe and the US. From the ECB, we will hear from Chief Economist Philip Lane, Belgium’s Pierre Wunsch and the Bundesbank’s Joachim Nagel, among others. In the US, Fed Chair Jerome Powell and the New York Fed’s John Williams will deliver speeches at a research conference, but the Fed chair's appearance at the IMF tomorrow will have more policy-related insights.

In government bond supply, Germany will sell €4bn in 10Y Bunds, but the main focus is the US Treasury’s sale of a new US$40bn 10Y note later in the day. A solid 3Y sale last night helped accelerate the curve’s bull flattening.