Fed Pivot Dominates Market Sentiment Again

Rates drop despite hawkish Fed commentary. Dovish sentiment from last week’s Powell speech and weak labor data continues to guide price action; despite hawkish commentary from multiple central bankers today, rates dropped across the curve. Short term yields were little changed compared to longer term yields, as the 10y yield dropped 8bps to 4.57% while the 2y fell only 2bps to 4.92%. Markets remain convinced that the Fed has reached its peak rate, as a hike is currently ~10% likely in December. 

Back to the old FHLB system? Systematic changes for FHLBs could be imminent, and a report today outlined potential paths forward, including an attempt by regulators to limit usage that is unrelated to housing financing. The Federal Housing Finance Agency proposed rules that would force banks to hold 10% of their assets in mortgage loans to maintain FHLB access. Meanwhile, the FHFA may consolidate some of the 11 FHLBs, though it remains unclear which are the main targets. Speaking on the matter, FHFA deputy director Joshua Stallings said, “The FHLBs have always had as a part of their mission providing general liquidity, and that’s not going to change… but the fact of the matter is that we have to ensure the Federal Home Loan Banks are operating in a safe and sound manner.”

Fedspeak resumes with hawkish undertones. The Fed blackout is over, and markets are now parsing through new Fed commentary following last week’s rate decision. Chicago Fed President Goolsbee said today that the top priority for policymakers is bringing inflation back to target, and as a result he said that the committee doesn’t want to “pre-commit” decisions on interest rates. He said that getting inflation down is the key priority, but also noted that a soft landing can still be achieved while managing inflation. Fed Governor Bowman also spoke today, but she had more hawkish comments and stated that she continues to “expect that we will need to increase the federal funds rate further to bring inflation down to our 2% target in a timely way.” Tomorrow, Chair Powell will continue the string of Fed commentary at the Fed’s Research and Statistics Conference, joined by President Williams and Vice Chair Jefferson.