By Konstantinos Chrysikos, Head of Customer Relationship Management at Kudotrade
The US dollar held firm on Tuesday, as cautious remarks from several Federal Reserve officials affected sentiment. St. Louis Fed President Alberto Musalem said the Fed should “tread cautiously” on monetary policy, noting that rates may already be close to neutral. Atlanta Fed President Raphael Bostic also argued that further cuts were unnecessary for now, stressing the importance of steering inflation back to the 2% target. Similarly, Cleveland Fed President Beth Hammack emphasised the need to be “very cautious” in removing policy restrictions.
The more cautious tone helped offset the contrasting remarks from newly appointed Governor Stephen Miran, who argued the Fed risks misjudging policy tightness and endangering the labor market without more aggressive easing.
Treasury yields remained relatively stable amid overall cautious remarks from Fed officials, but could remain under pressure as market expectations continue to see additional rate cuts in the coming months and a stable rate outlook afterwards. The 10-year yield held above 4.1%, its highest in three weeks, while the 2-year yield hovered near 3.6%, also at a three-week peak.
Investors are bracing for Powell’s remarks. Should Powell reinforce the need for prudence, both the dollar and yields could experience upward momentum, while any hint of openness to faster cuts could trigger additional weakness in the dollar and lower yields.