Yields move higher amid Fed's changes in inflation, unemployment approach

Treasury yields reversed higher on Thursday after Federal Reserve Chairman Jerome Powell announced a major policy shift to allow inflation to run hotter and unemployment to stay lower to support the economy.

The yield on the benchmark 10-year Treasury note cut earlier losses and gained 3 basis points to 0.729%. The yield on the 30-year Treasury bond jumped basis points to 1.483%. Yields move inversely to prices.

At the virtual Jackson Hole Economic Policy Symposium, Powell said the central bank formally agreed to a policy of "average inflation targeting." That means it will allow inflation to run "moderately" above the Fed's 2% goal "for some time" following periods when it has run below that objective.

"Many find it counterintuitive that the Fed would want to push up inflation," Powell said. "However, inflation that is persistently too low can pose serious risks to the economy."

The comments drove longer-term rates higher on expectations of rising inflation on the horizon. The front end of the yield curve dipped slightly.

"Now market has digested his comments and inflation expectations have moved higher in market and the yield curve is steepening on higher inflation," said John Briggs. head of strategy at NatWest Markets. "It's really the curve steepening out.. the front end is not moving at all. This is a big change but we've been talking about them adopting this for a long time."

Meanwhile, the Fed also adjusted its view of full employment to allow gains in the labor market to run more broadly. The move indicated that the Fed will be less inclined to hike interest rates when the unemployment rate falls, so long as inflation does not creep up as well.

"This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities," Powee said Thursday. "This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation."


On the data front, the Labor Department said Wednesday the number of Americans who filed for unemployment benefits for the first time totaled 1 million last week, in line with expectations. It marked the second consecutive week that weekly jobless claims tallied more than 1 million.

Meanwhile, the second reading on the second-quarter GDP was revised to a 31.7% decline, versus a 32.5% drop estimated.

The Treasury is due to auction $30 billion in 4-week bills, $35 billion in 8-week bills and $47 billion in 7-year notes.

— CNBC's Patti Domm contributed reporting.