By Howard Schneider
ATLANTA (Reuters) – The steady rise in long-term U.S. Treasury bond yields hasn’t yet shown signs of slowing the economy more than would be expected in a typical Federal Reserve tightening cycle, Atlanta Fed President Raphael Bostic said on Tuesday, becoming the latest U.S. central bank official to discount the market-driven spike in borrowing costs.
“Tighter financial conditions is part of what our policy is trying to create. It needs to translate into changes in economic outcomes,” Bostic said in comments to reporters. “I don’t think the degree of response to date has been out of bounds” of what would happen “in an ordinary tightening cycle.”
Should conditions tighten excessively because of different market forces, Bostic said it could prompt him to review a policy path that currently sees the Fed holding its benchmark overnight interest rate steady in the current 5.25%-5.50% range until near the end of next year, when rate cuts might begin.
But even though he agreed that recent jumps in long-term yields have been unusual, Bostic joined several of his colleagues in downplaying their relevance to policy – at least so far.
Since the Fed raised its policy rate by a quarter of a percentage point in July, the yield on the 10-year Treasury note has risen by more than three-quarters of a percentage point to around 4.6%.
The outsized rise on longer-term yields, which could raise financing costs for businesses and leave consumers with more expensive mortgages and loans, has sent economists scrambling to understand what’s in play – whether it is a response to rising U.S. debt, for example, changes in bond purchases by international actors like China, or concerns about global inflation and growth dynamics.
“There is a lot going on and I cannot say I have all the answers,” Bostic said.
What’s relevant to the Fed, however, is “the response of consumers … The things we are looking at is the pace at which the economy slows,” not the rates themselves.
(Reporting by Howard Schneider; Editing by Paul Simao)