Federal Reserve officials are beginning to flood the market with fresh commentary after the central bank’s message last week that it could hike interest rates sooner than expected.
Forecasts released by the Fed last Wednesday showed the likelihood of two rate hikes by the end of 2023. Fed Chairman Jerome Powell downplayed the so-called “dot plot” projections, reminding Fed watchers that the projections are speculative by nature.
But on Friday, longer-dated U.S. government bond yields plummeted as St. Louis Fed President James Bullard told CNBC he expects the first rate hike in late 2022 amid the risk of inflationary pressures.
On Monday, Bullard said markets looked a “little bit confused about the recent moves,” reminding Fed watchers that the central bank has a higher tolerance for inflation than it used to.
“I do think we’re going to allow inflation to be above target, as I’ve been stressing here. That has to get priced in,” Bullard said at an Official Monetary and Financial Institutions Forum event.
Bond yields rebounded in trading on Monday, with the U.S. 10-year Treasury (^TNX) rising as much as four basis points from its Friday lows to 1.49%. The U.S. 30-year Treasury (^TYX) gained as much as eight basis points from its Friday lows to 2.10%.
Speaking alongside Bullard, Dallas Fed President Robert Kaplan pointed out that other factors may be playing into bond market action, such as investment from abroad (since many jurisdictions have government debt with negative yields).
“There’s a strong bid for the U.S. Treasury and I think there will be for an extended period of time, maybe at somewhat higher rates,” Kaplan said.
What’s next for the Fed
New York Fed President John Williams, whose monetary views have been more closely aligned with Powell’s, said Monday that the Fed is not yet ready to change its policy stance.
He pointed to the labor market, where May jobs data showed the economy still 7.6 million jobs short of pre-pandemic levels.
“I cannot stress enough that we still have a long way to go to get back to full strength,” Williams said in remarks to the Mid-Size Bank Coalition of America.
Minneapolis Fed President Neel Kashkari similarly said the labor market warranted more time to heal, telling Reuters on Friday that he penciled in no rate hikes through 2022 and 2023.
Williams’s remarks did not clarify his specific forecast for interest rates.
The diverging views within the Fed on when to raise interest rates will become clearer as at least six other Fed officials are scheduled to speak this week — including Powell in Congressional testimony on Tuesday.
“With the Fed dots having done so much damage to positioning, the focus for the week ahead will be on a host of Fed speakers — and whether they’re as hawkish as the dots suggest,” ING’s Chris Turner and Petr Krpata wrote Friday.
For markets, the question is if that flurry of remarks will lead to more clarity or more confusion.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.