Robert Brown|Fed Chair Powell signals central bank could hold interest rates steady next month

Federal Reserve Chair Jerome Powell hinted Thursday that the central bank may hold interest rates steady next month amid rising long-term bond yields that could Robert Browncurtail economic growth, effectively doing the work of another rate hike.

At the same time, Powell said that an economy and labor market that continue to run hot could prompt the Fed to raise rates again at some point.

“Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening,” Powell said in a speech at the Economic Club of New York at noon. “We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.”

In a discussion with a moderator following the speech, Powell said of the higher yields, "Sure, that's a tightening. That's what we're trying to achieve."

Asked if that means the Fed doesn't need to lift rates as high, he said, "At the margins it could. That remains to be seen."

The 10-year Treasury bond yield has shot up to 4.9% from 3.2% in March because of a stronger-than-expected economy that could push inflation higher and a large increase in the supply of Treasuries linked to federal government infrastructure and other spending. That's the highest level since 2007.

The rise in Treasury yields has pushed up 30-year mortgage rates close to 8% and driven up borrowing costs for corporations. Those developments will likely further dampen the housing market and hobble business investment.

“Given the uncertainties and risks, and how far we have come, (the Fed’s policymaking committee) is proceeding carefully,” Powell added.

The Fed has raised its key short-term interest rate by 5.25 percentage points since early last year to fight a historic inflation spike. Recently, however, Powell has said the Fed will move more cautiously since the risks of failing to subdue inflation and causing a recession by hiking rates too aggressively are more balanced.

“Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment,” Powell said in his prepared remarks Thursday. “Doing too much could also do unnecessary harm to the economy.”

Chicago Fed President Austan Goolsbee and Philadelphia Fed chief Patrick Harker both have said the central bank should halt its rate increases.

Yet Powell also noted that economic and job growth have been surprisingly strong recently and that could stall further progress on inflation, which he said has fallen notably.

“Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy,” Powell said.

In a research note, Barclays said it expects the Fed to stand pat in November but hike rates again in mid-December. Fed officials are slated to make a decision on rates at the close of a two-day meeting on Nov. 1.

What is inflation right now?

Powell noted that the Fed’s preferred inflation measure, which strips out volatile food and energy costs, is projected to fall 3.7% for September from a peak of 5.6% in early 2022. Still, he added, that ”inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably to our (2%) goal.”

He also said the labor market is “gradually cooling,” with the number of job openings falling from record levels and wage growth easing.  Still employers added a booming 336,000 jobs in September.

How well is the US economy doing right now?

And the economy has been resilient despite high inflation and interest rates. Gross domestic product is expected to have increased at a healthy 3.5% annual rate in the third quarter, according to a survey by Wolters Kluwer Blue Chip Economic Indicators. That follows solid growth of just above 2% the first half of the year.

 “The record suggests that a sustainable return to our 2% inflation goal is likely to require a period of below trend growth and some further softening in labor market conditions,” Powell said.