Most Treasury yields hold steady day after Powell sticks with a hawkish tone

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Treasury yields were mixed Wednesday morning, a day after hawkish remarks by Federal Reserve Chairman Jerome Powell late Tuesday.

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The 2-year yield, which follows the path of Fed policy, was higher than the rest of the curve, shrinking the spread to the 10-year yield to below 26 basis points.

What Treasury yields are doing
What’s driving the market
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Yields held relative steady after rising on Tuesday, after US April retail sales data came in slightly below expectations but remained healthy.

Meanwhile Powell, speaking at a Wall Street Journal event on Tuesday said that the Fed would keep raising interest rates until there was “clear and convincing evidence” that inflation was coming down. He said that, if necessary, the Fed wouldn’t hesitate to push rates past “broadly understood levels of neutral” to bring down inflation.
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The neutral rate is the level at which policy neither boosts nor slows economic growth.

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Powell reiterated that half a percentage point interest rate hike at both the June and July meeting remained the baseline case. The Fed chief said there may be some “pain” ahead in terms of slower growth or higher unemployment but that there remained “plausible paths” to a “softish” landing for the economy.

Data released on Wednesday showed US housing starts dipped 0.2% to an annual pace of 1.72 million last month —- suggesting that rising mortgage rates, record home prices, and the high cost of building materials are starting to bite. Economists polled by MarketWatch had expected housing starts to register a 1.75 million rate after factoring in for typical seasonal swings in demand.

The number of permits, meanwhile, slipped 3.2% to a 1.82 million rate.

What analysts say

While the Fed chief sees a potential pathway to bring down inflation without a recession, “our sense is that Powell is being a bit more honest or realistic about the possibility that tightening might have to go so far that it tips the economy over the edge, ” said Steve Barrow, head of G-10 strategy at Standard Bank, in a note.


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