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Yields move higher amid Fed’s changes in inflation, unemployment approach

Treasury yields jumped higher on Thursday after Federal Reserve Chairman Jerome Powell announced a major policy shift to allow inflation to run hotter than normal to support the economy.

The yield on the benchmark 10-year Treasury note reversed earlier losses and gained 2 basis points to 0.712%. The yield on the 30-year Treasury bond jumped 5 basis points to 1.457%. Yields move inversely to prices.

At the virtual Jackson Hole Economic Policy Symposium, Powell said the central bank formally agreed to a policy of “average inflation targeting.” That means it will allow inflation to run “moderately” above the Fed’s 2% goal “for some time” following periods when it has run below that objective.

“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”

Meanwhile, Powell said the Fed will not set a specific goal for the unemployment rate but rather will allow conditions to dictate what it considers full employment. Previous Fed forecasts had expected inflation to rise well ahead of the 3.5% generational low that unemployment had hit prior to the pandemic, but that did not happen.

“A Fed Chair’s last stand at Jackson Hole bravely claiming monetary policy still has a role to play in a post-Covid world where interest rates will stay low forever in order to support the recovery and much more importantly, in order to give inflation a chance to creep back up to the 2% target and even run above target to make up for past undershoots,” said Chris Rupkey, MUFG Union Bank’s chief financial economist.

The move indicated that the Fed will be less inclined to hike interest rates when the unemployment rate falls, so long as inflation does not creep up as well.

On the data front, the Labor Department said Wednesday the number of Americans who filed for unemployment benefits for the first time totaled 1 million last week, in line with expectations. It marked the second consecutive week that weekly jobless claims tallied more than 1 million.

Meanwhile, the second reading on the second-quarter GDP was revised to a 31.7% decline, versus a 32.5% drop estimated.

The Treasury is due to auction $30 billion in 4-week bills, $35 billion in 8-week bills and $47 billion in 7-year notes.

— CNBC’s Silvia Amaro contributed reporting.

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