U.S. Treasury yields soar... Voices within the Federal Reserve say ‘prepare for market shock’

In the September minutes, there was an opinion to strengthen the government bond market response system... At that time, the transaction was smooth

Possibility of further increase within the year... The risk of high inflation and the economic outlook are the basis for the increase

With interest rates on long-term U.S. government bonds fluctuating at high levels, it was confirmed that the Federal Reserve (Fed) discussed preparing for a shock to the government bond market at its September meeting. The minutes of the Federal Open Market Committee (FOMC), released on the 7th (local time), included suggestions from a small number of participants to prepare for market instability, as well as policy judgments that left open the possibility of additional interest rate increases within the year.

On this day, the U.S. 10-year Treasury bond interest rate rose to 5.36% during the day, hitting the highest level in 24 years. Afterwards, as solid demand was confirmed in the bidding for 10-year Treasury bonds worth $39 billion, the increase narrowed to around 5.28% in the afternoon.

The proposal to prepare for market instability came amid an assessment that the government bond market was functioning smoothly at the meeting held on September 15-16. The idea was to strengthen response strategies, communication methods, and policy measures in case problems arise in future trading functions, but limit the Federal Reserve's share of the government bond market.

At the time, there were many opinions that overall financial conditions were supporting economic growth despite the rise in long-term government bond interest rates. The evidence provided was that stock prices rose significantly this year and the interest rate gap between corporate bonds and government bonds remained narrow. There were also evaluations that the policy interest rate did not restrict economic activity or that the extent to which it did so was weak.

In the price discussion, pressure from rising energy prices and increased investment in artificial intelligence (AI) was noted. There were many opinions that if high energy prices persist for a long time, there is a greater risk that the cost burden in certain sectors will spread to widespread price pressures. It was also pointed out that AI investment could stimulate prices by increasing demand faster than supply in the medium term.

Employment was generally evaluated as stable and close to maximum employment. The majority of attendees judged that the job market had strengthened somewhat. There was also a view that the overall wage increase was gradual and in line with the trend of prices falling to the target of 2%. In the overall risk assessment, the upside and downside risks of employment were largely balanced, while the possibility that prices would rise higher than expected was given more weight.

Based on this judgment, the Federal Reserve increased the base interest rate target range by 0.25 percentage points to 3.75-4.00% at the September meeting. Everyone agreed on the impression, but there were differences in the basis for judgment. There was a view that we should prepare for the risk of prices remaining at a high level due to stronger-than-expected demand or additional supply shocks, and a judgment that higher interest rates were necessary based on the economic and price outlook at the time.

Most attendees judged that it was highly likely that another interest rate increase by the end of the year would be appropriate. It was also announced that a decision will be made after examining newly announced economic indicators, the resulting economic outlook, and changes in risk factors at future meetings.