Vanguard senior economist Josh Hirt said on Friday that the Federal Reserve leaving interest rates unchanged at its September meeting could push Treasury yields higher.
The Federal Reserve is holding a closely watched monetary policy meeting this week as the market expects the central bank to hike interest rates amid concerns about stubborn inflation.
Policymakers have held interest rates steady at all five meetings held by the Federal Open Market Committee (FOMC) this year, with the benchmark federal funds rate sitting at a target range of 3.5% to 3.75%.
Persistent inflation above the Fed’s 2% long-run target has prompted concern among policymakers and has shifted the market’s outlook to anticipating a rate increase this week, with the CME FedWatch tool showing a 92.5% chance of a 25-basis-point hike versus a 7.5% probability of rates staying at their current level.
The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, was up 3.7% on an annual basis in July while core PCE, which excludes volatile food and energy prices, was up 3.3%. Another closely watched inflation measure, the consumer price index (CPI), was up 3.4% annually in August while core CPI was up 2.4%.
WHAT WARSH’S JACKSON HOLE SPEECH SIGNALS ABOUT WHERE INTEREST RATES ARE HEADED
Federal Reserve Chair Kevin Warsh and FOMC policymakers will announce an interest rate decision on Wednesday. (Li Yuanqing/Xinhua via Getty Images)
The anticipated rate hike comes as yields on U.S. Treasurys are rising, reaching the highest level in years amid competition in the fixed income market from foreign sovereign debt and corporate debt issuance.
The yield on the benchmark 10-year Treasury note is hovering around 5%, the highest level it’s been at since 2007. Higher interest rates on Treasurys increase the federal government’s cost to service its debt, which is a key driver of growing budget deficits.
Josh Hirt, senior economist at Vanguard, told FOX Business in an interview on Friday that the “developments over the last week, including the inflation report today, I think almost make the case that you could have a somewhat more adverse reaction if the Fed does not go [on Wednesday] unless the communication around the rationale behind that was extremely strong relative to them actually moving at this meeting.”
WARSH SAYS FED’S MAIN FOCUS SHOULD BE ON PRICES WITH CENTRAL BANK’S RATE POLICY IN FOCUS
Hirt said that he “wouldn’t see the immediate case for that to really extend any pricing if they were to move,” adding that “In fact, it could relieve some of the pressure in some extent, that the Fed did act, that the market is comfortable that they would be willing to do so.”
“I think that actually could very much be the case, in fact, rather than the alternative – which would be not going and the market potentially thinking about credibility issues and extending even further.”
“The base case would be if they were to move [on Wednesday], I wouldn’t see any necessary conditions that the market has to move higher based on that. In fact, it could potentially retrench a bit from where we are today,” Hirt added.
FED’S HAMMACK SAYS MULTIPLE RATE HIKES MAY BE NEEDED TO TAME INFLATION
Fed Chair Kevin Warsh was confirmed to the role in May and September marks the third FOMC meeting he has led. (Anna Moneymaker/Getty Images)
Wednesday’s FOMC announcement will also include the so-called “dot plot” that outlines how Fed policymakers view the future path of interest rates. Fed Chair Kevin Warsh declined to submit his own projection due to his opposition to providing forward guidance,
“If they were to move [on Wednesday] and you were to get, say, a level shift up in the dots at least by those participants that submit them, then that would really be an indication that I think the market could move on,” Hirt said.
“It wouldn’t be my base that you are going to see such a level shift,” he added. “At least based on the June numbers, the highest or most hawkish participant had about three rate hikes. It’s not clear to me that you would need to see a lot of members move much higher than that, if at all, but maybe just more a move up from those that didn’t have any or only had one rate hike.”
The market sees a higher likelihood of further interest rate hikes on the horizon after this week’s FOMC meeting, as policymakers will meet again in October and December to close out this year before kicking off their 2027 meetings in late January.
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The CME FedWatch tool shows a 49.7% chance of two 25-basis-point rate hikes before the end of the year to a range of 4% to 4.25%, with a 28.9% probability of three hikes of that size to a target of 4.25% to 4.5%. It also shows just a 20% chance of a single rate hike through year’s end.
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