Federal Reserve Chairman Jerome Powell makes 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 happening in the markets, especially bond yields which are rising again. The yield on the 10-year Treasury – the most important price in the global economy – rose from 0.917% at the start of the year to 1.37% on Monday. The German 10-year Bund, the eurozone’s benchmark bond, hit an eight-month high of minus-0.28% on Monday, after a 12 basis point rise last week. Japan’s 10-year government bond hit a two-year high of 0.12%.
Undoubtedly, this is in part a healthy response to good pandemic news. Falling cases in the US, UK and other vaccine leaders are bringing the light to the end of lockdowns. Bond investors expect growth to pick up and rising returns indicate faster growth. If true, expect economic optimism to push interest rates even higher, despite the Fed’s near-zero short-term target and aggressive asset purchases.
But Mr. Powell has gone to extraordinary lengths to keep interest rates low, so how does he view these recent bond moves? Is this healthy and is he satisfied that investors are making their best guesses about the recovery? Or does he plan to fight investors, perhaps with some version of the Japanese-style yield curve control that would capture interest rates over longer maturities? If so, why?
A less favorable interpretation of bond price developments is that investors expect the combination of an economic recovery, loose monetary policy and a fiscal outbreak by the Biden government to fuel inflation. An early warning could be last week’s report of a 1.3% rise in producer prices in January, a record high after 2009.