Week of October 9, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
The most recent U.S. Consumer Price Index (CPI) print was right in line with expectations. This followed a week in which two U.S. Federal Reserve officials, Dallas Fed President Lori Logan and Fed Vice Chair Philip Jefferson, provided insightful comments on where they thought monetary policy was heading.
As market yields have briskly risen, both central bankers called out the need to distinguish between a rise in yields associated with a strong economy and a rise associated with a higher term premium. The relevance is that a higher term premium signals a structural change, suggesting that the market thinks the longer run federal funds rate will be higher than it had initially assumed. This makes financial conditions more restrictive and helps the Fed hold off on more rate increases.?
Logan gave a fairly crisp but clear review of three different models that suggest over half of the recent jump in 10-year rates was as the result of changes in risk premiums. Jefferson also chimed in that the rise in bond yields and potential restrictive effects are becoming relevant for policy decisions. This presents further evidence that the Fed appears close to peak rates but is likely to hold off for longer on rate cuts.
Source: Bloomberg, Financial Times 2023.
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