Officials at the Federal Reserve have coalesced over the past week around a clear message: They can take afford to take their time and assess incoming economic data before moving forward with further interest rate increases. September’s jobs report from the Bureau of Labor Statistics on Friday added more credence to that view.
Monthly jobs growth slowed, the unemployment rate ticked up and wage gains remained muted, signs that the labor market, while not weak, is far from overheating.
Investors immediately pared back their expectations for an interest-rate increase when the Fed gathers later this month, just days before the midterm elections. Yields on U.S. government bonds fell across the board and the S&P 500 rose.
The data capped a busy week for policymakers at the central bank, who sought to counteract a newfound urgency that had been injected into the debate around an October policy move. The week prior, traders in federal funds futures markets ascribed roughly 70 percent odds to the Fed following up its quarter-point increase in September with another adjustment. As of Friday, those odds stand at only 20 percent.
The reset began on Tuesday when John C. Williams, who as president of the Federal Reserve Bank of New York is vice chair of the policy-setting committee, said there was “no need for urgency” in the wake of September’s increase. Two days later, Philip N. Jefferson, the Fed vice chair, said that assessing the timing of additional moves “may take more time.”
Later on Thursday, Michelle W. Bowman, the vice chair for supervision at the central bank, also called for more time to understand how slightly higher rates might work their way through the economy.
“I don’t currently see an urgent need for further action,” she added.
According to projections released by the Fed last month, most officials see at least one more quarter-point rate increase as appropriate this year. After October’s gathering, the Fed will have one more meeting in December.
What will no doubt factor into the pace of further increases after that point is the evolution of U.S. government bond yields, which, despite Friday’s pullback, are significantly higher than just a few months ago.
Lorie D. Logan, who as president of the Dallas Fed is a voting member on this year’s policy-setting committee, said in remarks on Thursday that higher longer-term yields, depending on what is driving the move, can potentially offset what the central bank needs to do in terms of rate increases.
If the run-up in yields is because of shifting expectations of what the Fed will do to stamp out elevated inflation, those moves “don’t do our work for us.” But if instead yields are rising because investors are demanding more compensation to hold debt with longer maturities, that “can slow the economy, reducing the need to tighten monetary policy.”
Still, she said, the Fed would likely need to raise rates by another half percentage point to ensure there is enough restraint on economic activity to bring inflation back down to the 2 percent target.
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