Jay Powell, Chairman of the Federal Reserve, triggered a sudden sell off of long-term US Treasury debt and stocks after promising to keep monetary policy loose even as the economy improved and inflation was starting to increase.
Speaking Thursday afternoon, Powell said the central bank expected to be “patient” in withdrawing support for the recovery, as the labor market remained far from the full employment target of central bank and had made little progress in recent months.
With such an accommodating tone, Powell failed to allay fears that the central bank was reacting too slowly to the recent rise in inflation expectations and long-term Treasury yields.
The Fed chairman suggested that while central bank officials are closely monitoring market movements, it would take a lot more to disrupt them.
“With regard to the bond market, I would be concerned about disorderly conditions in the markets or a persistent tightening in financial conditions that threatens the achievement of our goals,” said Powell.
Yields on 10-year Treasuries climbed 0.06 percentage points at one point to 1.54%, reigniting a rout in the $ 21 billion US government debt market. Tensions emerged last week as liquidity deteriorated, culminating in a weak 7-year T-bill auction on February 25 that pushed yields higher.
US stocks also sold sharply as Powell spoke, with the S&P 500 down 1.5% in afternoon trading. The highly technological Nasdaq Composite fell more than 2%, turning negative for the year.
Trading has been volatile for days as investors face the prospect of a stronger-than-expected recovery and higher inflation later this year. A market measure of inflation expectations, the 5-year equilibrium rate, hit 2.5% on Wednesday for the first time since 2008. Inflation is eroding the value of bond income payments, making them less attractive .
Powell said if the Fed faced an unhealthy price spike this year, it would be able to handle it. “We have the tools to make sure long-term inflation expectations are firmly anchored at 2%. Not materially above or below. And we will use these tools to make it happen, ”he said.
Such statements might not be enough to satisfy investors who are gearing up for stronger-than-expected growth due to the vaccination rollout and strong fiscal stimulus, combined with super-easy monetary policies.
“The bond market will not feel protected by what Powell said today from an inflation perspective,” said Padhraic Garvey, global head of debt and rates strategy at ING. “There is a lot of room for yields to move up.”
Given the Fed’s stance and expectations of a robust rebound, Garvey estimated that 10-year yields could reach 2% in the third quarter of this year.
Powell has done nothing to suggest that he is more concerned about the recent surge in long-term yields than he was last week when he called the surge in yields a ‘statement of confidence’ in the US economy, ”said Mike Schumacher of Wells Fargo. .