Federal Reserve Chairman Jerome Powell makes his biannual appearance at Capitol Hill this week. Investors have some questions, and so do members of Congress.
The first concerns what Powell believes is happening in the markets, especially bond yields that are rising again. The yield on the ten-year Treasury bill, the largest price in the world economy, rose to 1.37% on Monday, from 0.917% at the beginning of the year. The ten-year German bund, the eurozone benchmark bond, reached a eight-month high of 0.28% on Monday, after rising 12 basis points last week. Japan’s ten-year public debt reached a two-year high of 0.12%.
Undoubtedly, this is partly a good response to good pandemic news. The number of cases falling in the United States, the United Kingdom and other vaccine leaders sheds light on the end of the blockades. Bond investors expect growth to reactivate and rising yields indicate faster growth. If this is correct, expect economic optimism to increase yields further, despite the Fed’s near-zero short-term rate target and aggressive asset purchases.
But Mr. Powell has worked extraordinarily to keep yields low, so how do you see these recent bond moves? Is it healthy and satisfied for investors to make the best guesses about the recovery? Or do you intend to fight investors, perhaps with some version of the Japanese-style yield curve control that sets fiat rates at longer maturities? If so, why?
A less benign reading of bond price trends is that investors expect the combination of the economic recovery, weak monetary policy and a fiscal explosion from the Biden Administration to trigger inflation. An early warning could be last week’s report of a 1.3% rise in producer prices in January, a post-2009 high.