Fed May Not Have To Hike Interest Rates Further Thanks to Spiking Bond Yields

The bond market appears to be doing the job of the Federal Reserve as interest rates continue to rise, which means the central bank may be able to take a breather in its protracted fight against inflation.

"The need for us to take further action is diminished because financial markets are already moving into that direction and they've done the work," San Francisco Federal Reserve Bank President Mary Daly said Thursday.

The 10-year Treasury, a benchmark for everything from mortgages and auto loans to credit card rates, is yielding over 4.7%, hovering around a 16-year high. The Fed has already raised its key interest rate to 5.25% to 5.5%, a 22-year high.

Inflation has fallen from over 9% in June 2022 to 3.7% in August, as measured by the Consumer Price Index, and the economy is showing some signs of slowing.

"If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work," Daly said before the Economic Club of New York.

Still, the economy has proven more resilient than expected and inflation remains well-above the Fed's 2% target.

"If the deceleration of growth and inflation stall, activity begins to reaccelerate, or financial conditions reverse some of this tightening and loosen too much, well, we can react to those data and raise rates further until we are confident that monetary policy is sufficiently restrictive to complete the job," Daly said.

Daly is an alternate member of the Fed's rate-setting Federal Open Market Committee and does not have a vote on interest rates at present.

On Monday, voting member Michael Barr indicated he believed interest rates would likely need to remain higher for longer. Also on Monday, FOMC member Michelle Bowman said she thought another rate hike may be needed, as did FOMC member Neel Kashkari last week.

Those comments, however, preceded a huge spike in Treasury yields on Tuesday, which have only pulled back slightly.

The Fed next meets Oct. 31-Nov. 1 to decide on interest rates. Futures traders are putting odds at over 77% that policy makers will not raise rates further, according to the CME FedWatch Tool. They're also betting on a 67% chance of no rate hike in December.