The preview of Waller's Jackson Hole speech discusses the possibility that long-term rates could act as a substitute for Fed rate hikes. The author argues that higher long-term rates would tighten financial conditions and curb demand through data and market prices.
Waller's first speech at Jackson Hole will provide clues as to whether he intends to continue scaling back forward guidance and whether long-term rate movements will become a focus of monetary policy. The author theoretically examines a channel through which long-term rates directly affect financial conditions without relying on short-term policy.
Under a framework that allows long-term rates to rise, higher long-term rates and bond volatility could push up mortgage and corporate borrowing costs and widen credit spreads. This would tighten financial conditions in the market.
The recovery in the term premium and the rise in long-term rates point to a scenario in which the 10-year Treasury yield moves above 5%, while estimates also suggest that it remains below average levels before and after QE.
Monetary policy normalization in Japan is cited as a factor that could push up long-term rates globally, with developments in the Japanese market potentially moving in tandem with U.S. long-term rates.