Surging U.S. Treasury Yields: Will Rising Borrowing Costs Slow the Federal Reserve’s Rate Hike Pace?

Waller mentions the effect of rising long-term interest rates suppressing demand for housing and automobiles Market weighs freeze in October... Pay attention to US consumer prices tonight

In the U.S. Federal Reserve's (Fed) next interest rate decision, the impact of higher borrowing costs along with price trends on consumption and investment is expected to be a major variable. As the financial market focuses on freezing the base interest rate this month, attention is being paid to whether the slowdown in demand due to the rise in market interest rates will provide room to adjust the timing of further increases.

According to Bloomberg, Federal Reserve Director Christopher Waller said at an event held in India on the 13th (local time) that the rise in long-term U.S. Treasury yields is suppressing demand in interest rate-sensitive sectors such as housing and automobiles. The explanation is that higher market interest rates are playing a part in the role of tightening policy, even if it is not the result that the Federal Reserve directly intended.

According to Dow Jones, the interest rate on 10-year U.S. Treasury bonds fell to 5.216% on this day, but still exceeded 5%. LSEG data cited by the Wall Street Journal (WSJ) on the same day showed that the probability of an interest rate increase at this month's FOMC meeting was 19%. The market has highly evaluated the possibility of taking a break rather than immediately raising interest rates further following the September hike.

If long-term interest rates remain high, it can put a burden on housing mortgage loans and corporate financing costs, suppressing consumption and investment. If these effects accumulate, the Federal Reserve will be able to secure room to monitor changes in demand and prices before raising the base interest rate further.

However, it is too early to accept statements acknowledging the effect of tightening market interest rates as a declaration to stop further increases. On September 16, the Federal Reserve increased the base interest rate target range by 0.25 percentage points to 3.75-4.00% per year. The statement at the time explained that although economic activity was steadily expanding, the inflation rate was still high, and that the increase was intended to return prices to the 2% target.

In his official speech on the 8th, Director Waller also predicted that an additional increase would be necessary if economic indicators come out as expected. At the same time, it was stated that increases do not have to be made consecutively at every meeting and that there is flexibility in timing. Looking at the two statements together, it can be read as a position that the interval between increases can be adjusted according to economic and financial conditions while leaving open the possibility of further tightening to lower prices.

There was also a forecast that even if an additional increase is needed, it does not need to continue until next year. According to Reuters, John Williams, president of the Federal Reserve Bank of New York, maintained his previous position on the 13th that one additional increase this year may be appropriate. However, based on the current outlook, no additional increase is needed next year. This is President Williams' personal outlook, not a decision of the entire Federal Reserve.

Boston Fed President Susan Collins said on the same day that she expected it would be appropriate to raise interest rates slightly within the year. However, he added that the need and timing of additional measures will depend on future economic indicators and risk assessments. While Federal Reserve personnel support additional hikes, they are showing a stance that they will decide on a specific path after checking indicators.

The immediate confirmation indicator is the US September Consumer Price Index (CPI), which will be announced at 9:30 pm tonight (Korean time). As the next Federal Open Market Committee (FOMC) meeting will be held on the 27th and 28th, this price index is expected to be key data in determining the timing of further increases.

In this indicator, it is necessary to check the flow of core prices excluding food and energy along with overall prices. This is because the extent to which the impact of rising energy prices has spread to other products and services may affect the decision to tighten further. In this price announcement, Charles Schwab also presented as a key check whether the rise in energy prices has spread to prices across the economy.

If price pressures ease, there will be more room for the Federal Reserve to adjust the rate hike interval while observing the effects of higher market interest rates. Conversely, if inflation continues on a wide scale, it becomes difficult to judge that sufficient austerity has been achieved solely through the rise in government bond interest rates. The future path of interest rates will depend on how much market interest rates cool consumption and investment and whether those changes lead to a slowdown in prices.