Dovish Powell Sends Rates Lower

Powell’s policy outlook sends rates lower

The 10-year U.S. Treasury yield closed down 4 basis points at 1.31%. Swap rates and yields fell in response to comments from Federal Reserve Bank Chair Powell at the Fed’s annual Jackson Hole meeting.  In prepared remarks, Powell stated that the central bank could taper its $120 billion bond purchasing program in 2021. However, Powell also directed that any reduction in bond purchases should not be taken as an indication that the Fed would increase its benchmark interest rates soon thereafter. Powell said that any interest rate increases would face a “substantially more stringent test” compared to tapering its bond purchases.  The Fed has more recently placed a stronger emphasis on the labor market over price stability.  The FOMC’s next scheduled meeting is September 22^nd.  In an interview on Powell’s comments, Former U.S. Treasury Secretary Lawrence Summer suggested that Powell’s remarks amounted to a “serene” depiction of inflation that is misreading the risks. Summer said, “I think the inflation risks are graver than those that the chairman recognized.”

Consumer prices see highest increase in three decades

A key inflation indicator that the Federal Reserve uses as a policy guide increased again in July.  The Commerce Department reported today that core personal consumption expenditures (PCE) price index rose by 3.6% compared to a year ago.  It is the largest increase since 1991.  The PCE index is sometimes viewed as a more accurate measure of inflation than the consumer price index (CPI).  It tracks a broader range of goods and gives more weight to measuring when a consumer buys a cheaper product to substitute for a more expensive one.  Separately, the Office of Management and Budget said it expects consumer prices will rise 4.8% in the fourth quarter, up sharply from the 2% forecast that the Biden administration previously gave in May.

Consumer sentiment drops sharply in August

Consumers’ assessment of the economy diminished dramatically during the last month.  The University of Michigan reported that its consumer sentiment index fell sharply in August to 70.3, down from 81.2 in July. August’s consumer sentiment is near a decade low, while the expectations index, a measure of consumer’s future expectations, hit the lowest level since 2013. Richard Curtin, the director of the survey, attributed the drop to “the surging Delta variant, higher inflation, slower wage growth, and smaller declines in unemployment.” An alternative gauge of consumer sentiment, which places greater emphasis on views of the labor market, will be released by the Conference Board on Tuesday.