FED’S PAULSON SAYS MONETARY POLICY MUST STAY SOMEWHAT TIGHT AND THE CENTRAL BANK HAS “MORE WORK TO DO” TO REDUCE INFLATION

Federal Reserve official Paulson stated that monetary policy must remain somewhat restrictive and that the central bank has more work to do to bring inflation down. The remark signals that policymakers are not yet ready to pivot toward easing, which keeps the policy rate path anchored higher and sustains the rate differential that supports the dollar against lower-yielding peers. Front-end Treasury yields and fed funds futures are most sensitive to such guidance, since any repricing of expected cuts flows directly into two-year yields and then into mortgage rates, corporate borrowing costs, and rate-sensitive equities such as housing, utilities, and small caps. Traders should watch the next Personal Consumption Expenditures price index release, the core gauge the Fed targets, for evidence on whether services inflation is cooling enough to justify the patience Paulson described.

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