Powell speech, set amid surging Treasury yields, may clarify 'higher for longer' message

Federal Reserve Chairman Jerome Powell will make his final public appearance before next month's rate-setting meeting in New York Thursday amid one of the most aggressive bond market routs in years and renewed concern that the Fed's 'higher-for-longer' policy stance is creating turmoil in global markets. 

Powell is expected to delivery opening remarks, as well as participate in a question-and-answer session during an event hosted by the Economic Club of New York at noon eastern time, With stronger-than-expected jobs data, a resilient consumer and an economy running at a 5.4% growth clip, 

Powell is likely to reiterate the need for higher benchmark lending rates over the coming months, which will remain in place for some time, in order to tame the ensuring inflation pressures those data are likely to fan.

In doing so, however, Powell faces the risk of signaling tighter Fed policy in the face of rising geo-political tensions, which foremost include Israel's escalating war with Hamas that threatens to draw the wider middle east region into an extended military conflict. 

“The markets have largely priced-in that the Fed will stay on hold for rates at their next meeting and will be looking at Powell’s speech for clues that this is right," said Nigel Green of London-based financial advisory deVere Group.

“But we expect that recent events in the Middle East, and their effects on oil markets, will make Chair Powell more cautious than many had been expecting," he added.

Markets forecasts currently suggest the Fed will hold rates steady when its next two-day policy meeting wraps up on November 1, with the odds of a December hike pegged at around 35%.

Those odds shift notably, however, into January, with the CME Group's FedWatch indicating a near 50% chance of a least a quarter point rate hike, which would take the Fed Funds rate to a range of between 5.5% and 5.75%.

That is likely why markets are seeing the largest one-week rise in Treasury yields in more than eighteen months, with benchmark 10-year note yields adding around 35 basis points over the past four days to trade just under 5% for the first time since 2006.

Benchmark 2-year note yields, which are highly-sensitive to changes in interest rate forecasts, are up 20 basis points this week and hit a fresh 2006 high of 5.253% in overnight trading.

The sharp moves higher, which have added around 25 basis points to 10-year notes over the past three days, followed a stronger-than-expected reading of September retail sales, which rose 0.7% from the prior month to just over $704 billion, as well as solid industrial production data that indicates solid near-term growth for the domestic economy.

The Atlanta Fed's GDPNow forecasting tool, in fact, was revised higher yesterday to indicate a current-quarter advance of around 5.4%.

The upward spike in Treasury yields is also coming amid what would normally be a significant move into safe-haven assets linked to the accelerating military conflict in the Middle East.

"Markets are now conscious that US headline inflation remains uncomfortably high at 3.7% and that war in the Middle East brings further upside risk for inflation," said Saxo Bank's senior fixed income strategist Althea Spinozzi. "With the labor market remaining tight, the bond market cannot call the end of the Fed's interest rate cycle with certainty."

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