Fed: Neutral interest rate will not be 5 percent

Speaking at an event in Chicago, Daly said, "5 percent will not be the new neutral rate. There is no evidence that this will be the new neutral - this is still a policy rate trying to fight high inflation. I can fully imagine us going anywhere from 2.5 to 2.5 to 3 as a nominal neutral. But that is 50 basis points, not 250 basis points."

TREASURY BOND YIELDS HAVE RISEN 25 BASIS POINTS SINCE SEPTEMBER

Daly, who will not have a vote on the FOMC's interest rate decisions this year, is among the Fed officials signaling that tighter financial conditions caused by the recent rise in US Treasury bond yields could reduce the need for further interest rate hikes. Since the September meeting, 10-year Treasury bond yields have risen by approximately 25 basis points.

In her statement, Daly said, "Bond yields have tightened recently, which means financial conditions have tightened. If this is tight, perhaps the Fed does not need to do as much. Therefore, I have said that depending on whether this resolves or whether the momentum in the economy changes, this could be equivalent to another interest rate hike."

Futures markets show that the probability of the Fed making another 25 basis point hike at the FOMC meeting to be held on October 31-November 1 is less than 20%.

News Source: 12punto