US Treasury yields drop after Powell says Fed will act 'as appropriate' and inflation remains muted

U.S. government debt yields fell on Wednesday after Federal Reserve Chairman Jerome Powell said in prepared remarks that the inflation outlook looks muted and that the central bank will act "as appropriate" to sustain economic expansion.

At around 2:11 p.m. ET, the yield on the benchmark 10-year Treasury note, which moves inversely to price, was off highs hit earlier in the session at 2.06%, while the yield on the 30-year Treasury bond was slightly higher at around 2.568%. The 2-year Treasury note yield, sensitive to changes in Fed policy, fell 7 basis points to 1.834%.

"There is a risk that weak inflation will be even more persistent than we currently anticipate. We are carefully monitoring these developments, and we will continue to assess their implications for the U.S economic outlook and inflation," Powell said in his testimony.

"It appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook," he added.

Inflation, which central bankers like to keep around 2%, has seen a reversal over the last year. The consumer price index, which tracks the prices of a basket of consumer goods, fell from nearly 3% in 2018 to 1.8% in May 2019. Powell said Wednesday that the Fed's baseline case sees inflation trending back towards the Fed's objective over time.

The Federal Reserve's preferred inflation gauge, the core personal consumption expenditures index, was seen at 1.6% in May on a year-over-year basis.

"My sense is that Powell is more concerned about global financial conditions (weak global PMIs, low global inflation, weakening growth everywhere) than he is pacified by a strong US labor market," Jim Caron, Managing Director of Global Fixed Income at Morgan Stanley Investment Management, wrote in an emailed statement.

"I know the market is pricing 25bps in July. But I think it's now a closer call for 50bps cut," he added. "The Fed's thinking may be as follows… they need to cut by at least 50bps this year, so why wait."

Still, strong labor market data has raised questions about whether the Fed will move forward with lowering rates at its July meeting. The U.S. economy added 224,000 jobs in June while average hourly earnings increased 3.1% on a year-over-year basis.

Some fixed-income investors viewed Powell's comments ahead of his biannual report to Congress as further proof that the Fed will cut interest rates as early as late-July. The prevailing view, priced into the futures market, is for a 100% chance of a quarter-point rate cut July 31. The current overnight lending rate target is a range of 2.25% to 2.5%.

The central bank leader also noted that business investments across the U.S. have decelerated of late as worries over the economic outlook dog executives across the country.


— CNBC's Silvia Amaro contributed to this report.