Powell's 'higher for longer' mantra fans investor caution over economy
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[August 26, 2023] By
Davide Barbuscia and David Randall
NEW YORK (Reuters) -Federal Reserve Chair Jerome Powell on Friday did
little to dissuade markets from the “higher for longer” mantra for rates
that has driven up Treasury yields in recent weeks, leaving some
investors looking for more cautious bets in case the economy is unable
to escape a downturn next year.
Speaking at the Kansas City Fed's annual gathering in Jackson Hole,
Wyoming, Powell left open the possibility of further rate increases and
stressed the U.S. economy’s surprising strength, though he acknowledged
declines in the pace of inflation over the past year.
While more balanced than the Fed chair’s ultra-hawkish address at last
year’s symposium at Jackson Hole, the speech nevertheless offered little
solace to those hoping the central bank would nod towards eventual rate
cuts in 2024.
For some investors, the view also reinforced worries over the risk that
higher yields will eventually weigh on the economy’s robust growth and
bring on a potential downturn, though most believe the U.S. is likely to
avoid recession in 2023.
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“The recession risk is out there for 2024, and as such we want to … make
sure we’re in corporate debt that is well situated to sustain a
downturn,” said Cindy Beaulieu, managing director and portfolio manager
at Conning, which manages $205 billion.
“Those types of trades are important right now as opposed to trying to
take additional credit risk,” she said.
Financial markets on Friday saw little of the volatility that
accompanied last year’s Jackson Hole confab, when stocks sank more than
3.4%.
Yields on the benchmark 10-year Treasury, which move inversely to bond
prices, were basically unchanged on the day at 4.233%, though they
remained near 16-year highs hit earlier this month. Two-year yields -
which are more closely linked to monetary policy expectations - added
about four basis points.
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Stocks - which have wobbled in August as rising bond yields threatened
to dull the allure of equities - ended Friday's session higher with the
S&P 500 up 0.66%. Options markets were pricing in a move of around 0.9%
in the index ahead of the meeting.
The surge in bond yields over the last few months - driven by bets that
the Fed will need to keep rates around current levels for longer than
expected to prevent inflation from reigniting - has rippled out into the
economy, pushing 30-year mortgage rates to their highest level in over
20 years while credit spreads, a measure of risk, widened slightly this
month.
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![](../images/082623PIX/busine87.jpg)
Federal Reserve Chair Jerome Powell and
New York Fed President John Williams walk together, ahead of the
Kansas City Fed?s annual conference on monetary policy, in Jackson
Hole, Wyoming, U.S., August 22, 2019. REUTERS/Ann Saphir/file photo
![](http://archives.lincolndailynews.com/2023/Aug/26/images/ads/current/graue_lda_ENCLAVE3169preowned_081423.jpg)
Investors said much depended on what the next few weeks of data
show. The U.S. will report labor market data for August on Sept. 1,
and consumer price data on Sept. 13.
“Powell appears to be buying time and waiting for more data to come
in so that they can set themselves up to continue the soft landing
trajectory,” said Anders Persson, chief investment officer, global
fixed income, at Nuveen.
REVIVING RECESSION WORRIES
Some investors were worried that higher rates could weigh on growth
and increase the chances of a recession next year. Such a scenario,
in theory, would force the Fed to cut rates, pulling bond yields
lower.
“The prospect of a soft landing is lower after today,” said Mike
Sewell, a portfolio manager at T. Rowe Price, who expects to add to
long-term bonds over the fourth quarter as the U.S. economy begins
to weaken.
“We are waiting for financial conditions to crack,” he said.
Fed funds futures traders were pricing for a total of nearly 100
basis points of rate cuts next year, roughly unchanged from bets
prior to Powell's speech, but the first rate cut was pushed out to
June from May.
To be sure, betting against the U.S. economy has been a risky
endeavor this year. Many banks have reversed calls for a 2023
recession in recent months, while bets on economic resilience have
helped fuel a 15% rally in the S&P 500 year to date.
At the same time, many investors appear convinced that yields are
going to remain elevated for the time being.
Hedge funds' bearish bets on two-year U.S. Treasuries futures rose
to their highest since at least 1990 in the week ending on Aug. 22,
according to Commodity Futures Trading Commission data on Friday,
although they trimmed net shorts on 10-year note futures.
"The market is very short," said Josh Emanuel, chief investment
officer at investment management firm Wilshire.
But while risks remained that long-term bond yields could move
higher, he was looking to extend the duration of his portfolio. "We
are technically neutral today, but becoming increasingly bullish on
long-term Treasuries."
(Reporting by Davide Barbuscia and David Randall; Additional
reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and
Andrea Ricci)
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