• February 9, 2023

Questions for Chairman Powell – WSJ

Federal Reserve Chairman Jerome Powell performs biannually this week on Capitol Hill. Investors have a few questions, and so do members of Congress.

The first concerns what Powell thinks the markets are, particularly bond yields rising again. The yield on the 10-year Treasury note – the most important price in the world economy – rose from 0.917% at the beginning 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 rising 12 basis points last week. Japan’s 10-year government bond hit a two-year high of 0.12%.

Undoubtedly, this is partly a healthy response to good pandemic news. Falling case numbers in the US, UK and other leading vaccines bring the light to the end of the lockdowns. Bond investors expect growth to pick up, and rising yields signal faster growth. If that’s 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 went to extraordinary lengths to keep the returns down. How does he see this recent bond move? Is that healthy, and is he happy with investors making their best guesses about the recovery? Or does he intend to fight investors, perhaps with a version of the Japanese yield curve control, which sets the interest rates for longer maturities via fiat? If yes why?

A less innocuous look at bond price trends is that investors expect the combination of economic recovery, loose monetary policy, and a fiscal breakout by the Biden administration to spur 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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