Leading Federal Reserve officials suggested on Monday that the increasing yields on long-term U.S. Treasury bonds, which have a direct impact on borrowing costs for both households and businesses, might deter the Fed from pursuing additional hikes in its short-term policy rate.

Instead, they could rely on financial markets to take on a more significant role in shaping monetary policy, effectively substituting formal moves by the central bank.

“We are in a sensitive period of risk management, where we have to balance the risk of not having tightened enough, against the risk of policy being too restrictive,” Fed Vice Chair Philip Jefferson said.

He highlighted the increase in U.S. Treasury yields and emphasized the importance of the central bank exercising caution when considering any additional hikes in the benchmark federal funds rate, Reuters reported.

“I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy,” Jefferson said in remarks to the National Association for Business Economics.

The comments made by Jefferson, and earlier statements by Dallas Fed President Lorie Logan, a prominent figure in the Federal Reserve system when it comes to financial markets, led investors to diminish the probability of further rate hikes by the Fed.

Despite the fact that in a recent set of projections, policymakers indicated the likelihood of one more increase in the benchmark federal funds rate being necessary this year, the CME Group’s FedWatch data revealed a significant drop in the estimated probability of a rate hike at the upcoming Fed meeting.

It fell from approximately 27% at the beginning of the day to around 14% after the remarks of these two officials.

Similarly, the likelihood of a rate increase at the December meeting declined from approximately 36% to 24%.

Written by staff