Add “Persistently High” to “Higher for Longer”

Chief Economist Eugenio J. Alemán discusses current economic conditions.

After the September meeting of the Federal Open Market Committee (FOMC), Federal Reserve (Fed) officials were finally able to convince market participants, after more than a year, that the Fed needed to stay “higher for longer” in terms of interest rates. After the October/November meeting, it seems that Fed officials have an added objective, as Fed Chair Jerome Powell said during the press conference that they needed to see interest rates “persistently high.”

According to Powell, the Fed is still not convinced that monetary policy is sufficiently tight at this time and left the door open to the need for higher rates in the coming months. During the question-and-answer segment of the press conference after the finalization of the October/November FOMC, the Powell indicated that Fed officials were not convinced that the recent increase in the yield on the 10-year Treasury was the result of the institution’s monetary policy stance.

According to the chairman, the fact that yields on the 10-year Treasury have been going up and down as they have during the last several months and have not remained “persistently high” is one of the reasons why Fed officials are still not convinced that policy is sufficiently tight today. And on Thursday, the day after the press conference, markets basically confirmed Powell’s concerns as the yield on the 10-year Treasury declined from 4.9% on the day of the FOMC decision to about 4.66% the day after. On Friday, November 3, 2023, yields on the 10-year Treasury declined further, to about 4.64%. If yields continue to go down because markets believe that the Fed is done with rate hikes or if markets believe the U.S. economy is heading toward a recession or a crisis ensues, as happened with the banking sector crisis back in March of this year, the chances of the Fed increasing rates further will increase once again.

US 10 Year Treasury

Before the November 3, 2023, employment report, markets believed, by 80.5% to 19.5%, that the Fed was not going to increase interest rates at its FOMC meeting scheduled for December 12-13. However, after today’s employment report, the odds of keeping rates unchanged increased to 90.2%, reducing the odds of a hike to less than 10%. Typically, the Fed doesn’t like to go against markets. However, if yields on the 10-year Treasury continue to go down as the December FOMC meeting approaches, the expectations for lower long-term rates will increase and that will put pressure on Fed officials to increase rates further in order to convince markets of the need for “persistently high interest rates.”