Surging bond yields add to pressure for Powell's big speech Friday

Published Tue, Aug 22 202312:36 PM EDTUpdated Tue, Aug 22 20231:56 PM EDT

As if the stakes weren't high enough already, a recent jump in bond yields is putting additional pressure on Federal Reserve Chair Jerome Powell when he delivers a key address later this week. All eyes will be trained on the central bank leader when he makes his annual address Friday in Jackson Hole, Wyoming. That's the site of the Kansas City Fed's annual retreat , and often has served as a place for Fed leaders to chart a future course. Powell's speech, slated at 10:05 a.m. ET, could touch on any variety of topics, including the state of inflation, near-term policy implications and his views on whether the economy is still on track to achieve a "soft landing" after a series of interest rate hikes. Those are thorny enough topics by themselves. But a rise this week in the 10-year Treasury yield to its highest level in about 16 years brings a whole other set of questions, particularly on whether the move is in response to liquidity constraints, fears over inflation or simply an overabundance of supply. US10Y 1Y line 10-year yield soars Powell rarely if ever delves into such granular market topics, but any indication from him about the direction of policy could have substantial implications. "Strong US activity, increased Treasury issuance and the relaxation of yield-curve control are pushing longer-term yields to multi-year highs," Citigroup economist Andrew Hollenhorst wrote in a client note. "Powell will need to choose whether to accept or push back against the 'higher-for-longer' narrative at Jackson Hole on Friday." What the rise in yields means Like others on Wall Street, Hollenhorst expects Powell to tread lightly. "We think he will have little incentive to loosen financial conditions given a tight labor market and above-potential growth. Housing presents a particularly rate-sensitive upside risk to inflation that Powell is watching," he said. Bond yields are a helpful guide to inflation as they represent a measure of where markets think growth, policy and prices are heading. The 10-year yield has bounced sharply over the past year as the Fed has hiked benchmark interest rates . The note most recently yielded 4.33%, roughly flat on Tuesday's session but up more than half a percentage point just over the past month. That has come with one quarter-point Fed rate increase along with rising expectations that the economy may be able to avoid a much-predicted recession. Less certain is which way inflation is heading. Though recent data has been encouraging, central bank policymakers worry about letting their guard down too soon. Hollenhorst said he thinks the summer lull for inflation is likely to be temporary. "More important for the Fed are risks of a more sustained pick-up in inflation late this year or in 2024," he wrote. "First, and most obviously, tight labor markets and persistent wage pressure are unlikely to let services prices cool. Second, goods demand is once again strengthening." More rate hikes ahead? Powell almost certainly will provide some update on the state of play for inflation. In an unusually brief but sharply worded statement at last year's Jackson Hole gathering, the chair warned of "some pain" ahead as the Fed was likely to keep rates elevated. Current conditions, including the rise in yields, could be pointing to more sustained inflation. Steven Blitz, chief U.S. economist at TS Lombard, said he has been in the camp that the higher yields are the product of liquidity constraints in the bond market, but makes room for another possibility. "There is, however, a growing possibility that the jump in yields communicate that the opposite is occurring — growth is reaccelerating, and a much higher funds rate will inevitably be needed," Blitz wrote. "If that should be the case, the post-mortem will be that the [Federal Open Market Committee], in its zeal not to overtighten, let slip its hold on the economy by slowing the trajectory of rate hikes beginning last December," he added. "This will eventually be the stuff of Fed working papers to come, but it would be nice to hear Powell ponder these issues on Friday." This year's Jackson Hole symposium topic is "Structural Shifts in the Global Economy." The conference runs from Thursday through Saturday.