(Bloomberg) -- Treasury yields fell, with the US two-year benchmark tumbling sharply below 5%, after Federal Reserve Chair Jerome Powell said the current stance of policy is “sufficiently restrictive” and downplayed a future rate hike amid sticky inflation pressure.

Powell’s remarks extended a Treasury market rally that gained steam in the wake of the latest Fed policy statement that was less hawkish than many investors expected. 

US yields across the two- to 10-year maturities were more than 10 basis points lower at one point, with the two-year dipping below 4.93% as Powell was speaking. 

“There was concern that the press conference would be more hawkish,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “The fact that Powell is ruling out the next move being a hike is helping the market rally.” 

Wednesday’s advance follows a month of losses for the Treasury market, which declined in recent weeks as signs of economic resilience and stubborn inflation caused traders to scale back expectations for rate cuts this year. During his press conference, Powell said the tone of recent data means that “gaining the confidence needed to lower interest rates will take longer than previously expected.”

Though the central bank’s statement acknowledged “lack of further progress toward its 2% inflation goal in recent months,” market-implied expectations for at least one Fed rate cut this year remained intact. December swap contracts priced in a little more easing of about 33 basis points of easing by the central bank.

 

Powell said the FOMC believes that current rate policy “is restrictive, and we believe, over time, it will be sufficiently restrictive. That will be a question that the data will have to answer.” He added, “it is unlikely that the next rate move will be a hike.”

The chair left the path clear for a future easing while warning that “reducing policy restraint too late or too little could unduly weaken the economy and job market.”

Powell began modulating his message on rates last month, signaling policymakers will wait longer than previously anticipated to cut interest rates. In March he said the Fed was “not far” from having enough confidence that inflation was moving sustainably toward its 2% goal. 

Slower Roll-Off

Alongside the policy statement, the Fed’s monetary policy committee said it will slow by more than half the pace at which it’s been allowing its holdings of Treasury securities to roll off as they mature, to $25 billion a month from $60 billion. Most bond dealers had expected the pace of quantitative tightening to be trimmed to $30 billion. 

The decision is positive for the market because it stands to reduce the quantity of debt sold to the public, relative to what would otherwise be necessary. 

Ahead of the FOMC meeting, traders were confronted with a slew of US economic releases that underscored the challenges facing the central bank. The ISM manufacturing gauge declined more than anticipated, falling back below 50, a sign of contraction, while a related measure of prices paid by factories unexpectedly rose to the highest level in more than a year. 

Meanwhile, ISM’s gauge of manufacturing employment was stronger than expected, as was ADP’s separate measure of private-sector job creation, ahead of broader US labor data for April to be released on Friday.

“A relief rally in rates is not surprising and now we look to what the jobs reports says on Friday.” WisdomTree’s Flanagan said. 

--With assistance from Carter Johnson.

(Adds Powell comments, updates yields)

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