The bond market sold out Thursday when Federal Reserve Chairman Jerome Powell expressed little concern about inflation and gave no sign of impending policy changes.
In an exchange with The Wall Street Journal, the director of the central bank acknowledged that an economy that was recovering from the depths of the Covid-19 pandemic could see some prices fall.
But he also dismissed them as “fundamental effects.” In other words, prices in the next couple of months will look high, but only compared to last year, just as the pandemic began and inflationary pressures fell through. Floor.
In addition to signs of full earnings, Powell said, “We wanted inflation to be stable above 2% and we would want to be on track for inflation to run steadily above 2%.”
“There’s a lot of ground to cover before we get to that,” he said.
Bond markets sell through his views, pushing yields higher, as prices and yields move in other directions. Stocks also fell, putting the Dow businesses down more than 600 points.
Kryptonite inflation for the bond market is for a few reasons.
First, inflation erodes bond capital as rising output struggles, and typically fails, to keep up with price pressures. Rising yields mean falling prices.
Further, if inflation rises, that means that future interest payments received by one for maintaining the bond will be of less value.
Powell said the recent jump in output was “special and caught my eye,” but didn’t scare him. Instead, he said he would only be concerned with “chaotic market conditions”, which he did not point out to be true even though production is at its highest levels since the outbreak began.
Even if inflation rises, Powell and other Fed officials say they are content to let it run above their 2% target so that the labor market shows a full and inclusive recovery in line with income- in, gender and race.
Wall Street was looking for some indication of policy tweaks from the Fed. Instead of seeking a rate hike, some economists and investors are looking for the Fed to change the proportion of their monthly asset purchases.
One option is to sell short-term bills and buy notes with a longer date in an effort to build yield on the short term and reduce them later in time to the curve. smooth a product, in a process called Operation Twist.
Investors are worried that the Fed may once again have to hold on to walking rates when inflation comes. Stock market investors do not like to raise interest rates because they make it more expensive for lending companies and risk companies with debt that have relied on low rates.
“In terms of financial conditions, it will depend on the Fed whether they tighten further. The more dovish they get despite market expectations from higher inflation, the more There will be more financial squeezes that we will see, “wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group.
Boockvar said Fed officials have “put themselves in a difficult position” and must hope that inflation does not hit the 2% target before earnings also reach their target.
“If it does, they have a problem because they will be afraid to go against higher standards if they keep such a strong focus on employment,” he said.