Fed Speakers Unrattled by Stock Market Volatility

The U.S. Dollar posted its biggest one-day gain in more than three months against a basket of major currencies on Wednesday, helped by higher U.S. Treasury yields and geopolitical concerns in Europe. Gains may have been limited due to the stock market recovery which diminished its safe-haven appeal.

U.S. Treasury Markets

U.S. government debt yields rose to levels not seen since Friday in response to a soft Treasury auction and on the back of a new budget compromise among congressional leaders.

The yield on the benchmark 10-year Treasury Note added about 7.5 basis points to hit 2.845 percent, the same level which may have triggered last Friday’s stock market sell-off. The 30-year Treasury Bond also rose roughly 7 basis points to 3.117 percent.

In other news, the Treasury Department auctioned $24 billion in 10-year notes at a high yield of 2.811. The bid-to-cover ratio, an indicator of demand, was 2.34. Indirect bidders, which include major central banks, were awarded 67.5 percent. Direct bidders, which includes domestic money managers, bought 5.4 percent.

Additionally, Senate leaders announced that they had reached a two-year budget agreement Wednesday afternoon. The deal, which would boost current spending caps by about $300 billion, would include a significant allocation for military spending as well as funding for disaster relief and infrastructure.

Fed Speakers

The volatility in the stock market over recent days did not change the outlook for the U.S. economy or central bank policy, two senior Federal Reserve officials said on Wednesday.

Robert Kaplan, the Dallas Fed president, told the Financial Times that volatility was to be expected in markets and “can be healthy”, adding that he was sticking with a forecast of three increases in short-term interest rates this year.

William Dudley, the president of the Federal Reserve Bank of New York, said separately at a forum in Manhattan that he expected the turbulence to have virtually no consequence for the economic outlook, although further deep declines could start to change the prognosis.

“So far this is a big story in the press, it is a big story for financial market participants, but I don’t think it is a big story at all at this point for central bankers,” Dudley said.

Charles Evans, the Chicago Fed President, said separately in a speech on Wednesday that there was a hint of building pressures that could generate higher costs and prices, but that he wanted to see more evidence in the data. The dovish policymaker reiterated his argument that the central bank can afford to hold off further rate hikes until the middle of the year.

If inflation picks up “more assuredly” he said the Fed could easily raise rates another three or four times in 2018. “I would support such a faster pace if the data point convincingly in this direction,” he said in a speech in Des Moines, Iowa.