Investors await parade of Fed Speakers, Headlined by Jay Powell

Yahoo Finance's Brian Cheung shares how bond yields are moving on Friday and what comes next for the Fed's taper timeline.

Video transcript

BRIAN SOZZI: A few days after its closely watched policy decision, several key Fed members will show their faces out in public today. Yahoo Finance Fed correspondent Brian Cheung joins us with the details. Brian.

BRIAN CHEUNG: Hey. Well, Brian we're starting to get the flurry of Fed officials speaking. This will be the first kind of parade of commentary that we've heard since the Federal Reserve made their policy decision earlier this week, where they held interest rates at near zero, but signaled that a taper could be ready as soon as the next meeting in November.

So today, just this morning we got remarks from the Cleveland Fed President Loretta Mester. Esther George of Kansas City is set to speak in about 20 minutes or so, as are Chairman Powell, Governor Mickey Bowman, and Vice Chairman of the Fed Richard Clarida at an event later today. Now Powell, Bowman, and Clarida not necessarily expected to say that much, but we did hear a lot of monetary policy speak from the Cleveland Fed president earlier this morning.

She said, quote "we're still some distance from maximum employment," but she said that right now the upside risks to inflation are outweighing the downside risks to inflation. And the translation for that is that, this particular individual on the FOMC from the Cleveland Fed sees the inflationary pressures, maybe being more persistent than, say other of her-- or rather colleagues might be worried about.

She said, quote "if elevated, inflation readings were to persist longer and inflation expectations moved higher." Quote "monetary policy would need to be adjusted." She's not saying that's the case right now. In fact, she says that's not even her base case scenario. But we'll see if that type of sentiment is echoed by the other Hawks on the committee, namely like the likes of Esther George, which we'll hear from in about 20 minutes or so.

But again, this is just the first day of major Fed speak. Next week there's a number of other Fed officials scheduled to speak, in addition to the Fed chairman, who will have two days of testifying on Capitol Hill. So plenty of commentary to be had next week, guys.

JULIE HYMAN: So, Brian the Loretta Masters comments, and also the conversation that Brian and I were just having a few moments ago, brings up a question that I think we've talked about before. Which is even though it's not a word that the Fed is really using as much anymore, what is transitory, right? So is the same pace of inflation if it lasts for six months? If a year, is that still transitory? Have we-- we haven't really ever gotten precise framing on that, have we?

BRIAN CHEUNG: No, not really. And this is exactly the challenge that the Federal Reserve faces when it comes to the messaging that it's had. It's been using that word transitory since really the beginning of this year, when we started to see those inflation readings spike in the beginning of 2021. But at the time, there was a lot of optimism among the Federal Reserve that transitory would mean a few months.

And I think that it might be three, it might be six, depending on who you're talking to at that point in time. But I don't think many Fed officials who said they felt inflationary pressures would be transitory, thought it was going to last into the end of 2021. Which now appears to be the consensus.

You could see that through the upwards revision in the rates that we saw, as the projections for where the FOMC could see the year to 2021 ending, in terms of headline PCE. But also even core PCE inflation as well. So if it is indeed the case that you have the Fed, which is definitely language that they're still using saying yes, these price pressures will still be transitory. Well now you're talking about transitory instead of in a three to six month range, as was the case earlier in the year.

Maybe now they're referring it to more of a six to 12 month case. And the question is, of course, at what point after that, if you see some of these inflationary pressures go 12 to 18 months, does that become more persistent than transitory. That might depend on which FOMC member you're talking to.

JULIE HYMAN: Yes, indeed. And we might see maybe an acceleration of what's going on with rates from the Fed. Speaking of rates, let's talk about that movement in Treasury yields over the past what 24 hours, 36 hours, something like that. We saw yesterday the biggest, I think, single session increase in yields going back to February. It didn't happen right after the Fed Presser, though. It happened there was sort of a-- at least a 12 hour lag, I think before we saw that movement start to happen. I know there's been a lot of global central bank action, but what is going on there?

BRIAN CHEUNG: Yeah well, when it comes to the yield movement, it was really interesting to see, as you point out Julie, that the action was a bit split. When you took a look at Wednesday's action, obviously the FOMC came out at 2:00 PM, which is standard. The press conference was at 2:30. You actually saw yields sell off a little bit, or rather not sell off necessarily. Bond-- bond prices were going up.

But the 10 year yield came down by about two basis points in the afternoon on Wednesday, but then we saw the market action yesterday where bond yields ripped up. That means bond price down. We saw the 10 year rise as high as 10 basis points, the 30 year had a 10 basis point move.

Again these are still historically low levels. We know that these are still on both the 10 and the 30 year bonds, much lower than where they were in the spring. But still a 10 basis point move in one day is a pretty volatile change, for what's supposed to be one of the most liquid assets in the world.

And there's a number of different explanations for that. When it comes to bond yields moving, you can attribute that sometimes to foreign investment for people that just want or don't want US denominated dollar assets. It can also just be because of duration risk. But what we saw yesterday was actually a weird reversal. I was talking with one rate strategist, who said it seemed to be the opposite of what we saw after the June FOMC meeting. Where you recall, there was the hawkish surprise in the dots, showing two median rate hikes by the end of 2023.

Obviously, now that revision is even higher. But after the June FOMC, you saw yields go higher after the meeting. But then in the day after, they came back down. So maybe this was just a reversal of some of the changes that we saw in June. But of course, as it's always the case, with not just bonds but markets broadly, it's a little bit difficult to pin the narrative to one specific thing.

BRIAN SOZZI: I'm starting to get excited about that CD I've have had for the past 10 years with these rising yields. Good stuff, Brian Cheung. We'll check back with you later.