Oct 10, 2023 - Economy

Fed officials tap the brakes on rate surge

Federal Reserve vice chair Philip Jefferson

Fed vice chair Philip Jefferson speaks in Dallas on Monday. Photo: Nitashia Johnson/Bloomberg via Getty Images

The Federal Reserve's leadership has noticed the rapid rise in longer-term interest rates; they appreciate the economic damage that might inflict; and they'll take that into account in setting policy.

Why it matters: Those takeaways from two speeches Monday helped reverse — for the moment, at least — an extraordinary bond market sell-off that has sent mortgage rates and corporate borrowing costs skyrocketing.

  • But the nuanced message doesn't signal a reversal of the Fed's "higher for longer" rate message.

Driving the news: Philip Jefferson, the central bank's No. 2 official, said, "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," in a speech at the National Association for Business Economics.

  • Jefferson pledged to take "financial market developments into account along with the totality of incoming data" in judging what comes next for monetary policy.
  • Hours earlier at the same conference, Dallas Fed president Lorie Logan offered a more detailed examination of the underlying causes of the rates surge, and their implications.

Between the lines: That gave bond investors some comfort that the Fed will not ignore market moves and would back off tighter policy if there is reason to think that the economy is starting to crack — even if that consists of signals from financial markets rather than economic data.

  • The yield on 10-year U.S. Treasury securities had pulled back to 4.63% as of 11:45am EST on Tuesday. It reached 4.8% last week.

Yes, but: Underlying drivers of the higher long-term rates remain in place, including large anticipated U.S. budget deficits, solid growth and the Fed's ongoing shrinkage of its massive balance sheet.

  • That helps explain why the relief in bonds was relatively modest.
  • Mortgage rates, for example, were approaching 8% late last week. So while the change in tenor in the bond market Tuesday might bring some relief, homebuyers will still face more onerous borrowing than they have in decades.

Go deeper: Logan's speech includes a great explainer of the different components of the rates surge, each with different policy implications. Scroll down to the section heading "Interpreting the rate increases."

Go deeper