Powell Backs Multiple Hikes Again

Rates fall in the face of Powell’s hawkish tone. Swap rates and Treasury yields fell across the curve today despite Powell’s support for two potential rate hikes. The policy-sensitive 2-year yield dropped 5bps to 4.71% while the 10-year yield dropped 6bps to 3.71%. The 2s10s inversion now sits at -100bps, just 7bps off the greatest inversion seen in decades. 

Global central bankers see more tightening. Today, a group of central bankers met in Portugal and reinforced the need for further hikes. Appearing together, Chair Powell, ECB President Lagarde and BOE Governor Bailey all noted that they have a ways to go in calming inflation. Chair Powell stated, “although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough.” He indicated that he doesn’t see core inflation falling to 2% until 2025 and focused on the tightness of the US job market as a source of economic strength, but also a key inflation driver. Powell kept the possibility of hiking at two consecutive meetings open, and ECB President Lagarde said that an ECB hike next month is near-certain, but she was less clear on the outcome of the September meeting. A notable outlier was Bank of Japan Governor Ueda, who emphasized that hiking is on hold given inflation remains below 2% in Japan, though he noted this stance could change based on next year’s outlook.

Day ahead. Chair Powell’s speech will again highlight the session, with Fed non-voter Bostic set to follow at 3 PM. GDP and PCE data will be released in the early morning before pending home sales figures at 10 AM.