The Federal Reserve Jerome Powell (Jerome Powell) held a hearing on the “Quarterly Report of the CARES Act to Congress” at the Senate Banking Committee hearing on Capitol Hill in Washington, U.S., on December 1, 2020.
Susan Walsh | Reuters
The rise in bond yields and the accompanying inflation concerns have made the appearance of Federal Reserve Chairman Jerome Powell (Jerome Powell) in Congress this week even more dramatic.
As part of the statutory semi-annual monetary policy update, the governor of the central bank plans to address members of the Senate and House of Representatives for several days.
Normally, routine matters, the recent financial market turmoil and concerns about how the Fed might react have made investors pay more attention to the hearings on Tuesday and Wednesday than usual.
Nathan Sheets, chief economist of PGIM̵
What has attracted market attention recently is the rebound in government bond yields, especially on the curve.
Although the 2-year price for 2021 remains unchanged, as of Friday’s close, the 5-year price has risen by nearly 25%, while the yield on the benchmark 10-year Treasury has jumped 41 basis points to 1.34%. It is a field that it does not have. Starting at the same time in 2020, until the most serious pandemic.
The 30-year bond yield has soared even more, jumping by nearly half a point this year to 2.14%.
Powell’s dilemma is that rising bond yields may indicate that the Fed has been pushing the economy to reinflate, so there are good reasons for it to appreciate. However, if the trend gets out of control, the Fed may have to tighten policy faster than the market expected to offset some of the benefits of soaring yields.
To complicate the issue, if Powell is too complacent, the market may not like it.
Using the nickname of the chairman of the Federal Reserve, Seans said: “If this testimony is behind closed doors, I think Jay Powell will be very satisfied with everything he sees in the economy and the market.” “But considering it is public, He must be careful. If he is too optimistic about rising interest rates, the market will see it as an important green light for rising interest rates.”
He added: “The Fed is satisfied with the organic rise in interest rates because the organic rise in interest rates reflects a shift in perceptions of growth and inflation.” “But I think the Fed must also be careful not to create and expand self-sustaining momentum. This momentum will push up interest rates for other reasons.”
These “other reasons” are mainly worried that the economy may overheat.
Thrill and more thrill
In the past year, the Federal Reserve has been implementing loose policies, reducing the benchmark lending rate to close to zero and buying at least $120 billion in bonds every month. This is the basis of a series of borrowing and liquidity plans since maturity implemented at the beginning of the Covid-19 crisis.
In addition, Congress has introduced a fiscal stimulus package of more than 3 trillion US dollars, which may approve an additional 1.9 trillion US dollars by this weekend.
Everything that happens in an economic situation is still buzzing, except for the still troublesome employment problem mainly in the service industry. Wall Street is considering growth expectations for the first quarter, and market-based inflation indicators are rising.
This is why Powell’s tightrope walk is more noticeable this week.
Allianz’s chief economic adviser, Mohamed El-Erian, said on CNBC’s “Squawk Box” on Monday: “Market sentiment has changed.” Whether the yield will increase is no longer a problem, but the move is too big . This is what the market is trying to find out. “
Investors are particularly worried about whether all stimulus measures will not be over-implemented and may endanger economic stability in the long run.
“I can predict because [yields] Moving and the steep yield curve, the Fed may take more measures to control the yield. “
Fed officials have largely eliminated the so-called yield curve control in order to use its bond purchasing power to control interest rates between various fixed-income maturities.
But the market may force the Fed to play a role, and Powell is likely to be asked about his position on the tools the Fed must use to alleviate market problems. He repeatedly emphasized that the Fed has weapons to control inflation, but the deployment of these weapons requires a certain price. Unexpected actions by the Fed may make the market accustomed to low yields, and companies accustomed to cheap borrowing costs will feel uneasy.
On Monday morning, the President of the European Central Bank, Christine Lagarde, said that she is “closely monitoring changes in long-term nominal bond yields”, which proves the extent of the market’s attention to this issue. Her words were enough to calm a turbulent market and turn Wall Street’s opening losses into a mixed market, with the Dow Jones rising in afternoon trading. U.S. Treasury bond yields were basically flat that day.
Tom Lee, managing partner and head of research at Fundstrat Global Advisors, noted that his “clients have expressed concerns this week. This partly reflects the fact that bond yields have been rising steadily, while equity investment Those who are nervous about the bond market may reach a certain “breakpoint” in Powell’s testimony.
Powell addressed the Senate Finance Committee on Tuesday and the House Financial Services Committee on Wednesday.