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Analysts at Nomura point out that in his testimony to the House Banking Committee on 18 July, Federal Reserve Chair Powell was asked about the implications of recent movements in the yield curve for the outlook for the economy and monetary policy and his answer was revealing.

Key Quotes

“Powell focused on what long-term interest rates are telling us about how the neutral rate of interest is likely to evolve. Because term premia have remained very low, the rise in long-term interest rates over the past year seems to reflect an increase in the expected path of short-term interest rates. That may imply that the neutral rate of interest is likely higher, or will be higher, than previously thought.”

“A higher neutral rate would imply that the FOMC will need to raise short-term interest rates more than previously thought to contain the US economy’s considerable momentum.”

“Powell may have been signaling that he expects the FOMC to raise shortterm interest rates more over the next year or two than market participants currently expect.”