Government-bond yields edged higher on Friday after Federal Reserve Chairman
said that signs of slowing inflation haven’t given the central bank the all-clear to ease its tough stance against rising prices.
New data Friday morning from the Fed’s preferred inflation measurement confirmed investors’ sense that price pressures are cooling. Still, Mr. Powell said that the central bank’s job isn’t yet done: Its progress “falls far short” of what the Fed “will need to see before we are confident that inflation is moving down,” he told colleagues at the Fed’s annual conference in Jackson Hole, Wyo.
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After some early indecision, investors decided they didn’t like the implications of the comments. U.S. stock indexes dropped more than 1% and bond yields rose, indicating falling prices.
The yield on the 10-year U.S. Treasury note rose to 3.038%, from 3.023% at Thursday’s settlement. The yield on the two-year note—even more sensitive to near-term Fed policy expectations—hit 3.441%, up from 3.372% a day earlier.
Investors treat reliable debt payments from the U.S. government as a given, so pricing for a Treasury bond tends to reflect how traders expect the Fed to set benchmark interest rates over the bond’s life. Treasury yields, in turn, set a floor on interest costs for borrowers across the economy, from homeowners looking for a mortgage to businesses raising new funds.
Bond traders had been waiting for cues from Mr. Powell’s Friday speech about the direction of monetary policy into next year.
In July, the Federal Reserve ended its second straight meeting by raising rates by 0.75 percentage point, bringing the central bank’s target rate to 2.25% to 2.5%. In recent weeks, money managers have been split over whether the Fed is more likely to deliver another 0.75-percentage-point increase at its late September meeting, or whether it will ease up and raise rates by half a percentage point.
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Fed funds futures contracts, used by traders to bet on the path of interest rates, continued to give those each of those options a roughly 50% probability after Mr. Powell’s speech on Friday, according to
Earlier Friday, the Fed’s favored way to measure inflation—the personal consumption expenditure price index, or PCE—showed that core prices rose 0.1% month over month in July. That was down from a 0.6% rate in June, and confirmed data from the consumer-price index, released earlier in August, that showed price pressures flattening.
From short-dated Treasurys through 30-year bonds, price changes were muted after the inflation data and Mr. Powell’s speech, even though thin staffing on trading desks late in August can sometimes amplify big price swings.
Ahead of Mr. Powell’s speech, traders had been expecting “a solidly hawkish presentation” from him, said
head of U.S. rates strategy at BMO Capital Markets. Then, Friday morning’s lower-than-expected PCE figures gave some comfort to investors concerned about how high and how long Fed rates might stay into next year.
“If there was one key takeaway from this report, it was that inflation is now conforming to the peak inflation narrative,” Mr. Lyngen said.
Bond investors’ attention now turns to August’s employment report, set for release next Friday. An update on inflation is coming Sept. 13 in the form of August’s CPI.
Write to Matt Grossman at email@example.com
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