Three Fed Officials Turn Hawkish! Dollar Index Surges Past 104, U.S. Treasury Yields Hit 3-Month High

The dollar index broke above the 104 mark and U.S. Treasury yields reached a three-month high as three Federal Reserve officials all expressed a slow and cautious approach to rate cuts, boosting the dollar's strength.

Kashkari: Mild Rate Cuts, Tariffs Won’t Have Long-term Impact on Inflation

Minneapolis Fed President Neel Kashkari stated on Monday that he expects mild rate cuts over the coming quarters but added that signs of a faster-than-expected slowdown in the labor market could accelerate the pace of rate reductions.

“At present, I anticipate mild rate cuts over the next few quarters,” Kashkari said, downplaying the potential impact of changes in trade policy, including tariffs, on long-term inflation. “Tariffs themselves are unlikely to cause sustained inflation; they might only trigger a one-time change in price levels,” he added.

Kashkari also addressed potential changes in immigration policy that could affect the labor market, emphasizing that such shifts “will impact our interpretation of labor market conditions.”

Logan: Gradual Rate Cuts Still Needed

Dallas Fed President Lorie Logan reiterated on Monday that gradual rate cuts to a neutral level are still needed to manage risks associated with a quicker labor market cooldown or accelerated inflation.

“If the economy evolves as I currently expect, then gradually lowering policy rates to more normal or neutral levels will help manage risks and achieve our goals,” Logan said in a speech on Monday.

However, she also noted that despite the strong September jobs report, the risk of the labor market cooling faster than expected remains a concern.

Schmid: Favoring Cautious Moves, Rate Cuts Must Be “Careful and Deliberate”

Kansas City Fed President Jeffrey Schmid voiced support on Monday for a “careful and deliberate” approach to rate cuts, given that inflation is nearing the Fed’s 2% target and the labor market is normalizing.

In prepared remarks for the CFA Society Kansas City, Schmid said, “While I support easing restrictive policies, I am inclined to avoid aggressive actions, particularly given the uncertainty of the policy’s final trajectory and my desire to avoid exacerbating financial market volatility.”

“Gradual rate cuts will allow us time to observe the economy’s response to rate adjustments and leave room to assess the level at which rates neither restrict nor stimulate the economy.”

He also noted that the eventual equilibrium for rates is likely to be “significantly higher” than pre-pandemic levels.

Stronger Dollar and Treasury Yields

These statements have further reduced market expectations for significant Fed rate cuts in the near term. According to the Fed’s interest rate monitoring tools, the probability of a 25-basis-point rate cut in November has slightly dropped from 87.5% to 86.8%, while the likelihood of rates remaining unchanged increased from 12.5% to 13.2%.

Similarly, expectations for a December rate cut have cooled, with the probability of another 25-basis-point cut falling overnight from 74.6% to 61.9%. Meanwhile, the probability of keeping rates at 4.50%-4.75%—suggesting only one more cut this year—rose from 23.6% to 34.3%.

After the hawkish remarks, the dollar index, which tracks the greenback against six major trade-weighted currencies, surged 0.52% on Monday, reaching a high of 104.02, the highest level since August 2.

At the same time, the benchmark 10-year U.S. Treasury yield broke above 4.2%, hitting a peak of 4.223%, marking its highest level since late July.

However, before the Fed’s November meeting, several economic data releases could alter the current hawkish outlook, including initial jobless claims reports on October 24 and 31, the core PCE price index on October 31, and the October nonfarm payrolls report on November 1. If the labor market fails to exceed expectations, the hawkish sentiment could shift.