Did the Fed just let slip its playbook for year's end?

In an Oct. 19 speech at the Economic Club of New York, Fed chair Jerome Powell appeared to confirm one of Wall Street's speculations: no more rate hikes might be necessary to fight inflation.

The Fed’s saving grace is the bond market, where long-term yields have soared to their highest levels in decades. For the first time since 2007, the 10-year Treasury yield—the most influential credit benchmark—reached 5% this week.

“Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening,” Powell said in prepared remarks.

“We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.”

Rather than commit to further “tightening” (raising interest rates), Powell said: “We have to let this play out and watch it, but for now, it is clearly a tightening in financial conditions.”

When asked whether the recent jump in bond yields could substitute for further Fed rate hikes, Powell said, “At the margin, it could.”

Powell’s words might not seem like much, but for analysts keeping close tabs on the Fed, they signal an important shift in the central bank’s language.

Has the Fed plateaued?

What’s happening in the bond market “moves the needle towards the Fed doing less rather than more,” Shaun Osborne, chief foreign exchange strategist at Scotiabank, told Reuters. “I think we’re plateauing here.”

At the very least, Powell’s comments eliminate any meaningful threat of a rate hike at the Fed’s forthcoming meeting on Oct. 31-Nov. 1.

“For November, he has clearly sent a signal of pause,” Laura Rosner, partner at Macropolicy Perspectives LLC, told Bloomberg. “He expects the economy to cool down in the fourth quarter, and yields are doing some of the work for them.”

Wall Street agrees with that assessment. As recently as a few days ago, futures traders left a small window open for a November rate hike. But now, the odds of that happening are virtually zero, according to CME Group’s FedWatch Tool.

A delicate balance

The Fed faces a tough balancing act of trying to curb inflation without dragging the economy into a recession. But for now, economic growth has exceeded the Fed’s expectations, according to Powell.

Under normal circumstances, a stronger economy is something to celebrate—but not when the central bank is trying to rein in the largest inflation outbreak in half a century.

“Many forecasts called for the U.S. economy to be in recession this year. Not only has that not happened; growth is now running above its longer-run trend for this year. So that’s been a surprise,” Powell said after his prepared remarks.

Recent evidence that the economy is growing above trend includes a blowout September jobs report, higher retail sales, and stronger factory output.

Of course, economists can poke holes in all these numbers, especially the jobs data. The Fed, on the other hand, appears to take government reporting at face value.

Because of this, the Fed is “always going to dangle the possibility of another hike” until there’s evidence inflation is under control, according to Tim Duy, chief economist at SGH Macro Advisors.