Powell may lay out carpet for new era of higher rates later this week

investing.com:

Investing.com — President Jerome Powell is set to potentially deliver fresh clues on monetary policy later this week, but while many aren’t expecting the Fed chief's remarks to be laced with the warning of the “pain” from last year,  there are worries that he may tee up the idea of steeper longer-term interest rates.   

Chair Powell’s remarks are unlikely to carry the same «pain» warning as last year, Goldman Sachs says, but it seems the overall message will still be one of «seeing the job through.”

For the Fed, ‘seeing the job through’ likely resembles an economy achieving below-trend growth, and a pace of inflation that is clearly showing a sustainable downward path.

Getting the job done on inflation, however, may also force the Fed to raise its longer-run or neutral rate – a rate at which neither boosts or hinders economic growth –  implying a steeper path ahead for rates. 

A possible shift in thinking on the neutral rate deserves attention, Morgan Stanley says, because it would imply a shift in the expected path for the policy rate and thereby the yield curve as a whole.

Markets, however, aren’t waiting in the dark for fresh remarks from Powell. The bond market appears to be preparing for a more hawkish monetary policy road ahead, paved with higher-for-longer rates as hopes of seeing early-year rate cuts along the way fade.

The 10-year Treasury yield jumped to its highest level since 2007 on Monday as jitters grow that Powell may sow the seeds for a higher neutral rate.

Policymakers in June forecast a median estimate of the neutral rate of interest of 2.5%, implying a real rate of interest, or so-called r* or “r-star,”-- derived by subtracting the Fed’s 2% inflation – of 0.5%.

“Conceptually, if the policy rate is