Understanding the Impact of Rising US Treasury Bond Yields on the Federal Reserve’s Monetary Policy

2023-10-11 17:00:08

The American Federal Reserve, in Washington. MANDEL NGAN/AFP

Yields on US Treasury bonds are reaching levels not seen in twenty years.

The bond market now takes precedence over the monetary policy of the Federal Reserve. Without the latter having raised its key rate since the end of July, the effective cost of credit in the United States has soared.

Thursday’s release of the September consumer price index is one of the last key statistics expected before the next meeting of the Fed’s monetary committee on October 31 and November 1. The sharp rise in long-term rates in recent weeks poses a problem for Jerome Powell, the head of the central bank, and his colleagues.

Toughened financial conditions

Should they increase their key rate once more? Since the end of July, the Fed Funds rate has been set between 5.25% and 5.50%, a level not seen in more than twenty years. It determines at what price banks can lend each other liquidity in the very short term.

Or should they abstain, considering that “financial conditions» have themselves hardened enough to slow down demand that is still too much…

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