Bond Traders Ponder Four Fed Hikes in 2018 After Powell Remarks

(Bloomberg) -- So much for an uneventful Congressional question-and-answer session with new Federal Reserve Chairman Jerome Powell.

The U.S. Treasuries curve from five to 30 years flattened and two-year yields approached their highest levels since 2008 after Powell answered a question about what it would take to raise rates more aggressively than the three 2018 hikes that the Federal Open Market Committee projected in December.

Powell responded that his outlook for the economy has strengthened since December and the latest data have added to his confidence about inflation quickening. Shorter-dated Treasuries led initial declines as fed funds futures contracts now price in close to three full rate increases this year, up from 2.8 hikes Monday.

Wall Street banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among those calling for four hikes this year. Data released this month showed wage growth accelerated the most since 2009 and the core consumer price index increased the most month-over-month since 2005. Inflation has failed to meet the Fed's target even as the jobless rate sank, which has moderated expectations for the pace of hikes.

“We've seen some data that will, in my case, add some confidence to my view that inflation is moving up to target,” Powell said. “Each of us is going to be taking the developments since the December meeting into account, and writing down our new rate paths as we go into the March meeting.”

The benchmark 10-year yield rose six basis points to 2.92 percent as of 1:19 p.m. in New York. The two-year yield jumped above 2.27 percent, just shy of the year-to-date peak of 2.2781 percent set last week.

Front-end flows surged as the Treasury curve bear flattened. Eurodollar spreads steepened, reflecting a more hawkish monetary policy path expected for next year. Those expectations could be moved up even further if other Fed officials join Powell in offering a more upbeat assessment of the U.S. economy.

--With assistance from Vivien Lou Chen and Edward Bolingbroke

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net.

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

©2018 Bloomberg L.P.