Federal Reserve Chairman Jerome Powell makes his semiannual appearance on Capitol Hill this week. Investors have a few questions, so should Members of Congress.
The first relates to what Mr Powell believes is happening in markets, particularly rising bond yields. Yields on Finance’s 10-year note – the most important price in the global economy – rose 1.37% on Monday from 0.917% at the start of the year. The German 10-year bundle, the eurozone benchmark bond, hit an eight-month high of minus-0.28% on Monday, after rising 12 basis points last week. Japan’s 10-year government bond reached a two-year high of 0.12%.
Undoubtedly this is partly a healthy response to pandemic good news. Falling case counts in the US, UK and other vaccine leaders are bringing the light at the end of the lockouts. Bond investors expect growth to rebound, and rising yields indicate faster growth. If this is correct, economic optimism is expected to push yields even higher despite a short-term level target near zero Fed and aggressive asset purchases.
But Mr. Powell has gone to staggering levels to keep yields low, so how does he view those recent bond movements? Is this healthy, and are investors satisfied with making the best estimates of the recovery? Or is it intended to fight investors, perhaps with some sort of Japanese-style yield curve control that would set fiat levels at longer maturities? If so, why?
Such an unusual reading of bond price movements that investors expect the combination of economic recovery, loose monetary policy and a fiscal blow from the Biden Administration will stop inflation. An early warning of last week ‘s report may be about a 1.3% rise in January in producer prices, high after 2009.