Jumping yields, slumping stocks may boost case for a Fed pause

STORY CONTINUES BELOW THESE SALTWIRE VIDEOSBy Howard Schneider

But bond yields since then have raced higher, with the interest rate on a 10-year U.S. Treasury security rising from around 3.86% the day of the Fed's July 26 rate decision to as high as 4.32% on Thursday. Investors in contracts tied to the Fed's benchmark interest rate added to bets that it will move no higher, a view shared by 99 of 110 economists polled by Reuters this week who also see the risk of a U.S. recession in decline.

"A rise in yields on this scale represents a serious tightening of financial conditions in the Fed's standard framework," enough so that the Fed will want to"avoid piling on" with further tightening of its own, said Guha, a former official at the New York Fed. A new Fed financial conditions index has been falling since December, and some policymakers have cited higher home values and other factors as evidence monetary policy was not having as much impact on the economy as expected, and that rates might need to move higher still.

Normally, Fed officials would be expected to see that sort of economic strength as a reason inflation might stay high and require further rate increases.

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Jumping yields, slumping stocks may boost case for a Fed pauseRising Treasury bond yields and home mortgage rates may reduce support at the U.S. Federal Reserve for additional interest rate increases, the prospect of which have already been ebbing on the basis of weaker inflation. The Fed raised interest rates at its July meeting by a quarter of a percentage point, to a range of between 5.25% and 5.5%, a widely anticipated move investors have construed as the central bank's last step in an aggressive 16-month rate hike campaign to slow inflation from 40-year highs. But bond yields since then have raced higher, with the interest rate on a 10-year U.S. Treasury security rising from around 3.86% the day of the Fed's July 26 rate decision to as high as 4.32% on Thursday.
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Jumping yields, slumping stocks may boost case for a Fed pauseInvestors in contracts tied to benchmark interest rate added to bets that it will move no higher
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