Powell touts tight financial conditions, causing them to ease.

Nov 3
 After the Fed chairman revealed a rise in bond yields and the central bank held interest rates unchanged, stocks and Treasury bonds increased, contributing to tightening financial conditions that may eventually replace further rate hikes.
Both long-term bond yields and the policy-sensitive two-year bond yields that Powell referenced this week saw a significant decline following his comments. That lessened the impact of the most recent heartbreaking Treasury fiasco, which has affected asset values, put pressure on homebuyers, and increased the cost of doing business for corporate America and other countries.

While Powell noted that rising Treasury yields may alternatively assist the central bank in maintaining tight monetary conditions to shed this business cycle's inflationary excesses, the Fed left open the possibility of taking further policy action to assure robust economic growth.

The issue at hand is that Fed policymakers run the risk of being in a losing position if the financial environment considerably improves, and there are expectations, maybe stoked by Powell, that the US central bank has concluded its aggressive campaign of monetary tightening.

Former Federal Reserve Bank of New York president Bill Dudley stated, "I think one of the problems that the chairman faces at the moment is that by talking to the markets in a supportive manner, stocks go up and bond yields go down—that weakens financial conditions."

 "This eliminates a portion of the limitations that motivated people to refrain from additional monetary policy tightening," he continued.
Before the Fed's announcement, US rates started to decline after the Treasury declared that it would sell fewer securities than anticipated at its quarterly refinancing auctions the next week. Simultaneously, a measure of US manufacturing activity failed to meet forecasts.

More generally, as higher rates significantly pulled the S&P 500 index lower, the Bloomberg U.S. Financial Conditions Index, which gauges tensions in the money, bond, and stock markets, grew more restrictive for three months.
 
Although Powell on Wednesday hinted at the prospect of another boost in December, traders considered the Federal Open Market Committee's assessment that more stringent lending and financial regulations for individuals and companies will probably hurt hiring, inflation, and economic growth.

Former Fed Vice Chairman Richard Clarida stated, "However, the problem with adding financial conditions to the latest statement is that they can go up and down," warning policymakers not to depend too much on erratic market data.

Jim Reed, head of credit strategy for Europe and the USA at Deutsche Bank, commented, "We can't help but wonder whether yesterday's dovish market reaction could encourage some hawkish resistance, especially if it continues." Powell described the ongoing tightening of financial conditions as "critical."
 
The bank's analysts, among them Dan Peng, stated in a research note that "rising mortgage, corporate, and Treasury yields, coupled with a strong US dollar and weaker equities, add to the expected drag on the US economy." "If rising financial stability risks are not fully reflected by movements in the equity or corporate bond markets, the implied downside risk may be underestimated."

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