The Fed sees rising bond yields as a risk

The Fed sees rising bond yields as a risk

As was widely expected, the US Federal Reserve Board (Fed) delivered its second consecutive rate hold. The Fed undertook an aggressive path to tightening monetary policy since the beginning of 2022, seeking to bring down inflation. With inflation coming down and global economic conditions uncertain, the Fed appears to be treading carefully in its monetary policy decisions, looking to avoid overtightening, which could bring down the US economy.

• The Fed held its federal funds rate steady at a target range of 5.25%–5.50%. The rate hold was the second straight by the Fed as it monitors the impact of its policy on inflation, the labour market and the US economy.
• The Fed reinforced its commitment to bringing down inflation, while also trying to ensure it does not lift rates too high and drag down economic growth materially. The US central bank believes its current rate is restrictive and could continue to pull down inflation.
• Furthermore, the uncertain economic conditions prevailing in the global economy have helped push US bond yields higher in recent weeks, which could tighten financial conditions further and weigh on consumer and business activity.
• The Fed believes inflation remains at elevated levels, while the economy is strong. At the post-announcement press conference, Chair Jerome Powell did not entirely rule out another rate hike as the Fed is currently undecided on what it will do at its next meeting.

The Fed matched the Bank of Canada in holding interest rates steady at their most recent meetings. But the path forward could differ between the two central banks, with the Canadian economy stalling while the US economy expands at a relatively strong pace. The divergence between the two banks could put downward pressure on the Canadian dollar. No matter the direction of either central bank, financial markets could see some volatility in the near term as geopolitical tensions persist and tight financial conditions weigh on demand.

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