Federal Reserve President Jerome Powell makes his semiannual appearance on Capitol Hill this week. Investors have some questions, as do members of Congress.
The first concerns what Powell thinks is happening in the markets, especially yields on securities that are rising again. Yield on the 10-year Treasury bill – the most important price in the global economy – rose to 1.37% on Monday from 0.917% at the beginning of the year. The 10-year-old German bund, the eurozone’s benchmark security, reached a Monday high of -0.28% in eight months, after rising 12 basis points last week. Japan’s 10-year government bonds rose 0.12% in two years.
Without a doubt, this is partly a healthy response to the good news of the pandemic. The countdown of cases in the United States, the United Kingdom and other vaccine leaders is shedding light on the end of blockages in sight. Bond investors expect growth to recover and rising yields signal faster growth. If that is correct, expect economic optimism to further increase yields, despite the Fed’s near-zero short-term rate target and aggressive asset purchases.
But Powell went to great lengths to keep yields low, so how does he view these recent bond movements? Is this healthy and is he content with investors giving their best hints about recovery? Or does he intend to fight investors, perhaps with some Japanese-style version of the yield curve control that would set rates by decree over longer periods? If so, why?
A less benign reading of bond price trends is that investors expect the combination of economic recovery, loose monetary policy and a fiscal explosion from the Biden government to fuel inflation. An early warning could be last week’s report of a 1.3% increase in producer prices in January, a post-2009 high.