Bond Yields Climb as Fed Officials Signal More Tightening Possible

U.S. government bond yields ended higher on Friday, July 31, as oil prices advanced and investors weighed the possibility of another Federal Reserve rate increase this fall.

At the same time, the yield on the 2-year Treasury note added 6.6 basis points, reaching 4.295%, while the 30-year Treasury bond climbed 5.6 basis points, to 5.263%. A basis point is one-hundredth of a percentage point, and bond prices move inversely to yields.

Fed Officials Make the Case for More Hikes

Friday's yield move followed comments from several Fed policymakers who said they favor further rate increases to slow inflation. On Wednesday, the Federal Open Market Committee voted 9-3 to keep the benchmark interest rate between 3.5% and 3.75%.

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"In my view, now is the time for the [Federal Open Market Committee] to act to speed the return of PCE inflation to our 2 percent objective and deliver on our commitment to price stability for the American people," said Beth Hammack, president of the Cleveland Fed, in a statement. "The longer that high inflation persists, the more challenging and costly it can be to bring it back down."

Minneapolis Fed President Neel Kashkari made a similar case, arguing that incremental increases now could avert more aggressive action later. "In my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary," Kashkari stated.

Consumer Sentiment and Inflation Data

In a separate report, the University of Michigan said consumer sentiment ticked higher in July as worries about inflation eased. For inflation expectations, the one-year outlook slipped to 4.2% in July, four-tenths of a percentage point below May's mark and the weakest level since March. The five-year expectation stayed at 3.3%.

Thursday data from the personal consumption expenditures price index showed inflation still running above the Fed's goal. Core PCE, which strips out volatile food and energy categories, rose 0.1% on a monthly basis and 3.3% from a year earlier. Dow Jones-surveyed economists had forecast monthly and annual increases of 0.2% and 3.3%, respectively.

Slowing Growth

Economic growth also cooled in the second quarter, with U.S. GDP rising 1.5%. That was below the 1.8% Dow Jones consensus estimate. The mixed data leave the Fed in a delicate spot: rate increases are meant to cool demand and return inflation to the central bank's 2% objective, but tighter policy can also weigh on growth. Next week's jobs numbers could help shape the debate before the central bank's next meeting.

Friday's rise capped a week in which inflation and growth data pointed in different directions. That mixed picture is why the upcoming JOLTS and nonfarm payrolls reports are so important for the next policy decision.

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