Cleveland Fed President Hammack said on Friday that the recent sustained rise in long-term US Treasury yields is the result of multiple factors, including strong US economic growth prospects, an expanding scale of government debt, and rising investor expectations that the Federal Reserve will raise interest rates further.
Speaking on Friday at a conference hosted by the Cleveland Fed, Hammack said: "I think there are several factors at play. One of them is that recently released economic growth data have been quite strong, and the market also expects this performance to continue." She also noted that the market's judgment about the Fed's next policy move is one of the important reasons driving long-term US Treasury yields higher. At present, investors are further pricing in the possibility that the Fed will continue to raise rates.
Fed officials voted unanimously last week to raise the benchmark interest rate by 25 basis points. The rate projections released after the meeting showed that, based on the median of officials' forecasts, the Fed is expected to raise rates one more time before the end of this year.
In recent days, several Fed officials have mentioned that the US economy is maintaining growth momentum and that the labor market remains strong, and they believe these factors may mean further rate hikes are still necessary. Market expectations for a rate hike have also clearly heated up. According to federal funds futures pricing, investors currently expect about a 65% probability that the Fed will raise rates in October.
Hammack said bond investors are considering how the Fed may respond in policy terms to strong economic data and what policy adjustments may need to be implemented next. In other words, if the economy continues to show resilience and inflationary pressures persist, expectations that the Fed will maintain a more restrictive monetary policy could continue to be reflected in long-term Treasury yields.
In addition to economic growth and monetary policy, Hammack also listed US government spending and growing debt as important factors affecting long-term yields. Hammack, who worked at Goldman Sachs for about 30 years before joining the Fed in 2024, said investors have been closely watching the impact of rising government spending and debt levels.
Notably, she also mentioned that the US government now needs to compete for funds in financing markets with large-scale artificial intelligence investment projects. As AI infrastructure construction expands rapidly, data centers, power and other related projects need to absorb large amounts of capital. When the government itself also needs to raise substantial funds by issuing Treasury bonds, competition for capital may intensify, thereby creating upward pressure on long-term interest rates.
Therefore, in Hammack's view, the rise in long-term US Treasury yields cannot simply be attributed to a single factor, but is the result of the combined effects of strong economic growth, market expectations for further rate hikes, increased government debt and rising capital demand.
Regarding why US Treasury yields have been climbing recently, Fed Chairman Warsh offered an explanation last week that has both similarities with Hammack's view and certain differences. Like Hammack, Warsh believes that stronger economic growth and increasingly fierce competition for capital are important reasons driving bond yields higher. However, when explaining other driving factors, the two placed emphasis on different aspects. Hammack stressed investors' expectations for further Fed rate hikes, while Warsh did not include monetary policy expectations among the main reasons and instead cited geopolitical factors as another important explanation.
Comments