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Federal Reserve Chairman Jerome Powell is making his semi-annual appearance on Capitol Hill this week. Investors have a few questions, and so do members of Congress.
The first concerns what Mr. Powell thinks is going on in the markets, particularly bond yields which are going up. The yield on the 10-year Treasury bill – the most important price in the global economy – jumped to 1.37% on Monday from 0.917% at the start of the year. The German 10-year bund, the benchmark euro-zone bond, hit an eight-month high at minus 0.28% on Monday, after rising 12 basis points last week. Japanese 10-year government bonds hit a two-year high of 0.12%.
There’s no doubt that this is partly a healthy response to the good pandemic news. Declining cases in the US, UK and other vaccine leaders highlight the end of lockdowns. Bond investors expect growth to pick up and rising yields indicate faster growth. If this is correct, expect economic optimism to push yields even higher despite the Fed’s near-zero short-term rate target and aggressive asset purchases.
But Mr Powell has made extraordinary efforts to keep yields low, so how does he see these recent bond moves? Is it healthy and is he content with investors making their best guesses about the recovery? Or does he intend to fight investors, perhaps with a Japanese-style version of yield curve control that would fix fiat rates at longer maturities? If yes, why?
A less benign reading of bond price trends is that investors expect the combination of the economic recovery, loose monetary policy and a budget explosion from the Biden administration will fuel inflation. An early warning could be last week’s report of a 1.3% increase in producer prices in January, a high after 2009.
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