Fed's Jefferson: I will consider higher bond yields when assessing the future rate path

Federal Reserve (Fed) Vice Chair Philip N. Jefferson stated on Monday that he will take into account the recent rise in bond yields when evaluating the future direction of monetary policy. 

Speaking at the 65th Annual Meeting of the National Association for Business Economics in Dallas, Texas, Jefferson acknowledged the potential delayed impact of previous interest rate increases when determining the necessity for additional policy tightening. He anticipates a further moderation in core consumer inflation and a gradual improvement in labor market conditions.

Key takeaways from the speech: 

“I believe that core PCE prices will moderate further as the labor market comes into better balance.”

“Despite the strong September labor market data we received last week, there is evidence that the imbalance between labor demand and labor supply continues to narrow, as labor demand cools while labor supply improves. Even so, the labor market remains tight.”

“Slowing labor demand and improving labor supply have eased pressure in the labor market, and my expectation is for further gradual easing in labor market conditions, as restrictive monetary policy continues to slow labor demand without causing an abrupt increase in layoffs or the unemployment rate.”

“Real long-term Treasury yields have risen recently. In part, the upward movement in real yields may reflect investors' assessment that the underlying momentum of the economy is stronger than previously recognized and, as a result, a restrictive stance of monetary policy may be needed for longer than previously thought in order to return inflation to 2 percent. But I am also mindful that increases in real yields can arise from changes in investor's attitudes toward risk and uncertainty.”

“Looking ahead, I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy.”

“I will be taking financial market developments into account along with the totality of incoming data in assessing the economic outlook and the risks surrounding the outlook and in judging the appropriate future course of policy.”

Market reaction

During the American session, the US Dollar weakened as US stocks reversed losses and moved into positive territory. The US Dollar Index (DXY) is relatively unchanged for the day, hovering around 106.10, after briefly trading above 106.50 earlier on Monday.