Powell told the Senate Banking Committee the Fed will likely need to raise interest rates more than expected in response to recent strong data and is prepared to move in larger steps if the “totality” of incoming information suggests tougher measures are needed to control inflation.
“There has been a lot of volatility in what Powell has been saying over the past couple of months so there is a little bit of a surprise in the market by just how forthright he was about the potential for a larger move in this upcoming meeting … and the potential for a higher terminal,” said Gennadiy Goldberg, interest rates strategist at TD Securities in New York.
“It’s the fact they are opening the door back to a potential 50 basis point move should the data warrant it and given how data dependent they have been it does make it a little difficult to couch how serious they are about it, so we will have to continue waiting and watching the data unfortunately,” Goldberg added.
The yield on 10-year Treasury notes was down 2.7 basis points to 3.956%.
The yield on the 30-year Treasury bond was down 3.3 basis points to 3.879%.
Yields have steadily climbed in recent weeks after the January jobs report and other economic data pointed to a labor market that remains tight, which increased expectations the Fed will have to maintain its path of rate hikes as inflation remains stubbornly high.
The February jobs report due on Friday is expected to show nonfarm payrolls increased by 203,000, according to economists polled by Reuters, after the much stronger-than-expected 517,000 jobs reported in January.
Fed funds futures were now pricing in a greater chance of nearly 50% for a 50 basis point hike at the central bank’s March 22 policy announcement.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 98.7 basis points. Such an inversion is seen as a reliable recession indicator.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 4.7 basis points at 4.941%.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.677%, after closing at 2.764% on Monday.
The 10-year TIPS breakeven rate was last at 2.424%, indicating the market sees inflation averaging 2.4% a year for the next decade.
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