Higher long-term bond yields will allow the Fed to do less on short rates.
Conversations about the Federal Reserve can be challenging. Those who don't pay close attention to financial markets often ascribe much more power to the central bank than it really has. The only rate the Fed controls is the Fed Funds Rate (FFR), at which banks lend to each other overnight. Shorter-term rates are well correlated with the FFR, but the farther out one goes on the yield curve, the less power the Fed has to steer.
This week brought signs that the recent runup in longer-dated Treasury yields has captured Fed leaders' attention, likely bringing an end to the rate hiking cycle. The yield on the ten-year U.S. Treasury rose from 4.1% at the end of August to a recent high of 4.8%. The salient question has been, what changed?
A higher-for-longer rate outlook has been the conventional wisdom for quite some time. Guidance from the Fed throughout the summer poured cold water on expectations of a rapid monetary policy retreat next year. Treasury issuance has been elevated since the debt ceiling was resolved, but the auctions of new debt have been orderly.
Long term rates are the sum of the yields earned by short term bonds, plus a term premium, the additional compensation to an investor for locking up capital for a longer period. The term premium is not an explicit spread or fee, but rather, an implicit cost set in market transactions. It appears the recent runup has been a function of higher term premia for U.S. Treasury debt.