Treasury yields fall after Fed’s inflation gauge misses forecasts

U.S. government debt yields fell on Friday after the Federal Reserve’s preferred inflation metric fell short of expectations in the government’s first look at third-quarter economic activity.

The Commerce Department reported the U.S. economy grew at a 3.5 percent rate in the third quarter, faster than economists had expected. The government added that its personal consumption expenditures (PCE) index, a key measure of inflation, increased by 1.6 percent last quarter.

Bonds have rallied over the past few weeks as fears of rising inflation push traders into safer assets like government debt. Since the PCE index is the Federal Reserve’s preferred inflation gauge, any sign that the measure may be slowing could stall the central bank in its plan to continue to raise the overnight rate.

At 4:32 p.m. ET, the yield on the benchmark 10-year Treasury note had fallen to 3.079 percent, while the yield on the 30-year Treasury bond dipped to 3.315 percent. Bond yields move inversely to prices.

“The key element is the inflation numbers,” said Scott Brown, chief economist at Raymond James. “It’s now back below the Fed’s 2 percent goal and may make them a little more gradual. They’ve been raising once a quarter, so now maybe it will become once every three meetings.”

Consumer spending, which account for more than two-thirds of economic activity, surged by 4 percent in the third quarter, the fastest pace since the fourth quarter of 2014, the government said.

The Federal Open Market Committee (FOMC) hiked its benchmark interest rate by a quarter point last month and announced that an additional hike was projected by year-end, while three more were penciled in for 2019. The September hiked marked the third hike for the Fed in 2018.

Fed Chair Jerome Powell has also said he does not see a buildup in fundamental inflation and does not anticipate prices surprising to the upside.

“The main thing where we might need to move along a little bit quicker if inflation surprises to the upside. We don’t see that,” Powell told reporters during his quarterly news conference in September.

The latest move in yields comes as investors shun risk assets in favor of traditionally safe haven assets like gold, the Japanese yen and Treasurys.

The U.S. stock market has undergone a rollercoaster ride this week, with the Dow turning negative for the year on Wednesday before recovering some of those losses on Thursday.

— CNBC’s
Ryan Browne
contributed reporting.

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