Synopsis: MUFG observes that recent remarks by Federal Reserve officials suggest unease with the rapid ascent in US yields, implying that the central bank may hesitate to hike rates again in the near term. The market's interpretation of these signals may lead to further pressure on the USD.
US Dollar's Position: The recent surge in US yields, if maintained, may deter the Fed from implementing its proposed final rate hike for the year. Such prospects have exerted downward pressure on the US dollar.
Fed Officials Weigh In: Fed Vice Chair Jefferson's recent comments indicate a more cautious stance, emphasizing the need to consider the implications of higher bond yields on future policy adjustments. His cautious tone hints that an immediate rate hike in the upcoming month is unlikely.
More Insight from the Fed: Dallas Fed President Logan provided an in-depth examination of the recent upswing in US bond yields and its possible repercussions on Fed decisions. She highlighted the "substantial" recent financial tightening and explored the factors driving the increase in yields, including economic growth momentum, adjustments in the neutral policy rate, and the rise in the term premium. Interestingly, Logan believes the term premium has played a pivotal role, attributing more than half of the yield surge since July to this factor. A persistent elevated term premium could reduce the necessity for the Fed to further tighten its policy via rate increases.
Implications for Monetary Policy: These observations align with MUFG's perspective that the Fed's policy trajectory is now at a standstill, with the potential for rate reductions next year in response to a decelerating pace of growth and inflation.
Conclusion: A noticeable shift in the Federal Reserve's tone has been observed, revealing heightened concern over the swift uptick in US yields. If this sentiment holds, it could have significant implications for the future direction of US monetary policy and the broader financial markets.