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MNI INTERVIEW: Fed "Sweating" Yields But Lean To Hike- English


The U.S. job market has enough momentum for the Federal Reserve to tighten monetary policy a little further even if they take some time “sweating” the potential economic drag from the recent rise in bond yields, former Fed board economist Bill English told MNI.

Unemployment remains below 4% and elevated job vacancies suggest could be even tighter than is generally believed, he said in an interview. The September job report released last week showed the economy adding 336,000 jobs, more than triple the pace Fed officials view as consistent with a balanced economy.

“The Fed would be happier if the labor market were a little bit less tight,” he said, especially at a time when consensus surveys suggest economic growth picked up to a 3% pace in the third quarter from around 2% earlier this year. The Fed's September dot plot showed officials believe they can tighten a bit more to pull inflation back to target without boosting unemployment much above 4%, which would be an incredible soft landing, said English, who was director of the Fed board's Division of Monetary and Secretary to the Federal Open Market Committee.

The jump in 10-year Treasury yields is not a compelling reason to stop hiking if the economy keeps running too hot, English said. Ten-year yields have climbed to about 4.6% from 3.4% over the last six months, topping out at their highest in 16 years. English said the spike is due to a mix factors like investors internalizing rising term premiums and digesting the Fed's higher for longer message on rates.

“If you look at market-based measures of where investors think the Fed is going to be in terms of policy, those have gone up a lot this year as the economy has stayed just surprisingly strong,” he said. “I don’t think that’s a reason for the Fed to do anything different than before.” (See: MNI INTERVIEW: High Inflation Points To More Fed Hikes-Lacker)


While some Fed officials have suggested higher yields mean another hike isn't needed hawks like Governor Chris Waller probably want to go ahead, English said, noting “they will be sweating” over this kind of decision.

“If the Fed were seen as saying we’re done, we’re not raising rates anymore, that could ease financial conditions a fair amount, that’s not what they want,” English said. “But the increase in long-term rates is pretty big, and I guess if you were close before, now you’ll be inclined to wait, and waiting isn’t the same as promising that you are done.”

The Fed's last month held the benchmark rate in a range of 5.25% to 5.5% and the dot plot suggested another quarter point hike this year while pushing back the scale of potential rate cuts next year. The Fed's vague guidance is a genuine reflection around the economy's uncertain path and the potential that past patterns such as the lagged effect of rate hikes have shifted after the pandemic upheaval, he said.

“There’s kind of a normalization trend here that suggests inflation will continue to come down gradually over the next year or two back to the Fed’s 2% target,” he said.

“At this point, the hope is that they can either stop now or maybe do one more rate hike and then they can calibrate when do they start reducing rates and how quickly do they start reducing,” he said. “If the economy doesn’t slow from here, the labor market doesn’t slow from here, they may well need to do more.”

MNI Ottawa Bureau | +1 613-314-9647 |
MNI Ottawa Bureau | +1 613-314-9647 |

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