Strong economy may need more restraint, but bond markets are helping: Powell
U.S. economy's strength and continued tight labor markets could require still tougher borrowing conditions to control inflation, Fed Chair Jerome Powell said on Thursday, though rising market interest rates could make action by the central bank itself less necessary.
Appearing to align himself with Fed colleagues who have recently said the bond market is now doing some of the central bank's work for it, Powell in remarks to the Economic Club of New York agreed «in principle» that the rise in yields was helping to further tighten financial conditions and «at the margin» might lessen the need for additional Fed rate increases.
It was not an explicit endorsement of that view, but financial markets seemed to read it as one.
As Powell spoke investors leaned further into bets that the Fed is done raising its short-term benchmark interest rate. Futures that settle to the Fed's policy rate are now pricing less than a one-in-three chance of another rate hike this year, down from about 40% before he spoke.
The interest rate on 10- and 30-year Treasury bonds rose as Powell made his remarks.
In raising the Fed's benchmark interest rate «the whole idea...is to affect financial conditions,» Powell said.
Bond markets «are producing tighter financial conditions right now,» and seemed to be moving for a variety of reasons, such as an upgraded view of the U.S. economy's strength, independent of any expectations about the Fed.
It is an important distinction, Powell noted.
