Earlier this year, US Treasury Secretary Scott Bessent said that he and President Donald Trump were focusing on the 10-year Treasury bond yield as a key metric for economic health, rather than the Fed's short-term interest rate. He stated, "He and I are focused on the 10-year Treasury," indicating a strategy to manage borrowing costs through fiscal policy rather than pressuring the Fed to cut rates. That didn't last long. Within a few weeks, Trump started badgering Powell to lower the federal funds rate.
Today, Fed Chair Jerome Powell poked a stick at the White House. He suggested that bond yields might stay elevated as a result of more frequent "supply shocks," like tariffs. "Higher real rates may also reflect the possibility that inflation could be more volatile going forward than in the inter-crisis period of the 2010s," Powell said in prepared remarks for the Thomas Laubach Research Conference in Washington, D.C. "We may be entering a period of more frequent, and potentially more persistent, supply shocks—a difficult challenge for the economy and for central banks."
Sounds like Powell is expecting more frequent bouts of stagflation, which was associated with supply shocks in the past. The stock and bond markets didn't react much to the speech partly because today's batch of indicators were mostly ambiguous about the near-term prospects for stagflation. Consider the following:
(1) Jobless claims remain in a 205,000-243,000 range, one consistent with a historically low level of layoffs. In the week ended May 10, claims held steady at a seasonally adjusted 229,000 (chart). Continuing claims for the week through May 3 increased marginally to 1.88 million compared with 1.87 million a week earlier. Still, even if the tariffs discourage businesses from boosting hiring, we're not seeing a sudden surge in pink slips.
