Fed's Powell: Recap of pivotal speech as bond yields surge (2024)

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"It is very strange to me, as a long time central bank dove myself, to be in a situation where we've been at full employment for a couple years, have had real income growth, and have persistent inflation, and not act as though taking out insurance against inflation is the wiser course. It is just bizarre," Posen said, in an interview.

Could the Fed be worried about popping an asset bubble?

"If they are scared of something, they owe it to the markets and, more importantly, the American people, to express what they're scared of and see if they can get someone to address it," he said.

At Jackson Hole, Posen said he was 85% sure that the Fed would hike in either November or December.

So, if all of this turns out that the Fed is just kicking the can until December, it is not a big deal, he said.

"But if it turns out this is them saying we think we're done. I think they are just getting it wrong," he said.

Treasury yields pushed back toward session highs after the conclusion of Fed Chair Jerome Powell's midday talk at the Economic Club of New York. With the 10-year yield just shy of the 5% threshold, the Dow industrials dropped over 200 points.

Reading between the lines of Powell's comments, it appears the Fed chair was offering a strong signal that policy makers will leave rates unchanged, as expected, on Nov. 1, says Neil Dutta, head of economics at Renaissance Macro Research.

In a note, Dutta pointed to this remark from Powell: "Given the uncertainties and risks, and how far we have come, the Committee is proceeding carefully."

According to Dutta, that's "code for we are definitely not moving at the next meeting."

Similarly, Powell's description of the Fed's policy stance as "restrictive" alongside the observation that there be meaningful tightening in the pipeline as a result of past hikes offered good reasons to not expect tightening in December either, Dutta said.

"Of course, this is all conditional on the evolution of the data as Powell notes. But, my sense of the Q4 outlook is that there is more downside to inflation than there is upside to growth," Dutta said. "So, for that reason, I suspect the Fed is done for 2023."

It was a bumpy ride, with stocks flipping between gains and losses during Powell's remarks. As Powell wrapped things up, stocks were back in the green, with the Doow rising around 130 points, or 0.4%, while the S&P 500 and Nasdaq were both up 0.3%.

Treasury yields were mixed, with the 10-year rate off its high just shy of 5% to trade near 4.949%, while the 2-year yield fell 2.6 basis points to 5.187%.

Powell's aim was to calm markets, said Jeffrey Roach, chief economist for LPL Financial. Powell said that the markets are overpricing the likelihood of more rate hikes. The Beige Book, released Wednesday, revealed that the economy is no longer on a strong growth trajectory, Roach said.

The Fed chief is engaging in a bit of a tightrope act, says David Russell, global head of market strategy at TradeStation.

“Jerome Powell continues to walk a middle line between hawk and dove. The Fed still isn’t sure whether it’s done enough. He noted positives in the labor market, but it’s hard to get too dovish given this week’s retail sales and jobless claims. So, he’s keeping his options open and waiting for more clarity before committing either way,” Russell said in emailed comments.

Fed Chairman Jerome Powell said the central bank's independence "is not for times when we're popular." He noted that home builders have been hit hard in recent weeks by rising interest rates.

Fed Chairman Jerome Powell said that the rise in longer-term bond yields was caused by a mix of short-term and longer-term factors. The Fed chairman said markets may be responding to the outlook for the federal deficit and the Fed's quantitative tightening moves. He noted that yields are not reflecting higher expected inflation.

Powell defended the strong fiscal and monetary policy response to the pandemic in March 2020. In hindsight, policymakers might have done less and inflation might not have been so hot, Powell said. But the Fed chairman said the economy is doing very well now, with the lowest unemployment since the 1960s.

Powell says he doesn't see evidence rates are too high right now, noting continued economic strength in the face of tighter policy. That may tell you that the neutral rate of interest --- the level at which rates neither boost nor slow the economy --- is higher, or it could just mean rates haven't been high enough for long enough.

Stocks have given up gains seen after Powell's initial comments, while Treasury yields have creeped back higher.