WASHINGTON – The US Federal Reserve signalled that a run-up in long-term Treasury yields reduces the impetus to raise interest rates again, even as chair Jerome Powell left the door open to another hike to tame inflation.

While Mr Powell indicated policymakers could raise rates when they meet in December, he also allowed that officials may be done with their tightening campaign.

He said he was not yet confident to judge whether monetary policy was restrictive enough to bring inflation back to the Fed’s 2 per cent target.

“It’s fair to say that’s the question we’re asking is ‘Should we hike more?’” Mr Powell said, when asked whether a majority of policymakers still expected another rate increase would be necessary in 2023.

The US central bank’s policy-setting Federal Open Market Committee (FOMC) held interest rates at a 22-year high for a second straight meeting on Wednesday.

The committee said in a post-meeting statement that “tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation”, adding the word “financial” to language that previously referred only to credit conditions.

“The extent of these effects remains uncertain,” the Fed said, repeating that it “remains highly attentive to inflation risks”.

The S&P 500 index and Treasuries extended their rally, while the US dollar slipped after the announcement.

Traders also marked down chances of another hike over the coming months.

In his press conference, Mr Powell said financial conditions have “tightened significantly in recent months driven by higher, longer-term bond yields, among other factors”.

The Fed chief said previous rate hikes were putting downward pressure on economic activity and inflation, and the full effects of tightening had yet to be felt.

“In the light of the uncertainties and risks and how far we have come, the committee is proceeding carefully,” Mr Powell said. “We will continue to make our decisions meeting by meeting.”

He also said additional evidence of persistently above-trend growth, or that tightness in the labour market is no longer easing, could put further progress on inflation at risk and could warrant further rate increases, echoing remarks he made in New York in October.

Unanimous decision

The unanimous decision left the target range for the benchmark federal funds rate unchanged at 5.25 per cent to 5.5 per cent, the highest since 2001, as part of a strategy to slow the pace of rate increases as the central bank nears the end of its tightening campaign.

Officials made minimal changes to the statement.

One tweak was to upgrade their description of the pace of economic growth to “strong” from “solid” to reflect better economic data released since their September gathering.

Policymakers repeated that, in determining “the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time”, they would take into account the cumulative tightening of monetary policy, as well as lag effects on the economy and inflation.

Hike odds

Heading into the decision, traders saw a one-in-three chance of a 25-basis-point increase by the end of January.

The odds dropped after the decision.

The FOMC meets next on Dec 12-13 and then on Jan 30-31.

After rapidly raising borrowing costs from near-zero levels in March 2022 to fight against inflation, officials are taking time to assess the effects of their past rate moves without ruling out further tightening.

Some officials have also said the recent surge in long-term Treasury yields may reduce the need for further rate increases.

GDP growth

The US economy expanded at a 4.9 per cent annualised rate in the last quarter, the fastest clip in almost two years, as consumers splurged broadly on furniture, travel and other discretionary purchases.

A measure of underlying inflation that is closely watched by Fed officials also accelerated to a four-month high in September, when job gains blew past expectations.

Policymakers will get another update on the employment picture on Friday, when the Labour Department will release the jobs report for October.

Whether that economic strength persists or slows down is one of the biggest questions facing policymakers, and the outcome has the potential to shape the direction for inflation and interest rates.

Projections released at the Fed’s September gathering showed a majority of policymakers at the time supported one more rate increase in 2023. They also saw borrowing costs remaining higher for longer.

Treasury yields

But a rise in yields since the gathering has prompted some officials, including Dallas Fed president Lorie Logan and other hawkish policymakers, to signal support for another pause in rate increases at this week’s meeting.

Many forecasters expect spending and growth to slow in this quarter as larger debt payments, lower income gains and shrinking cash piles weigh on households.

Tentative agreements between the United Auto Workers union and all three of Detroit’s biggest automakers remove one economic obstacle.

But officials will need to monitor other possible headwinds, including mortgage rates near 8 per cent sidelining home buyers, a potential US government shutdown and an escalating war between Israel and Hamas.

However, other policymakers say they are concerned the surprisingly strong economy may cause inflation to remain stubbornly high for longer than officials would like to see. BLOOMBERG