The Markets and Mr. Powell

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The editorial office

Apr. 25, 2021, 6:43 p.m. ET

Jerome Powell, Chairman of the Federal Reserve, on March 3, 2020.


Eric Baradat / Agence France-Presse / Getty Images

So much for Jerome Powell’s assurances. Just one day after the two-day Federal Reserve Chairman, nothing to worry Tour of Capitol HillThe financial markets suddenly found cause for concern on Thursday. Stocks fell sharply as the 10-year Treasury note yield saw its largest one-day rise since November, to its highest level in a year.

Often referred to as the world’s premier price, the 10-year Treasury Treasury has risen around 58 basis points in about two months to a return of 1.525%. The rapid movement took the markets by surprise. The Fed should keep long bond prices down for months, if not years, in order to make its quantitative easing bond purchases.

What does that mean? The confident interpretation is that bonds are only signaling that as UK Prime Minister markets are finally seeing the “sunlit highlands” of post-pandemic optimism

Boris Johnson

like to say. Growth means more risk taking, and rising rates are often associated with economic recoveries and faster growth. By any normal historical standard, a 10-year return of 1.525% is hardly a cause for concern.

There is no doubt that the economy will be prepared for a growth boom in 2021 when the pandemic subsides. Pent up consumer savings and pent up animal spirits are sure to be released as the vaccine rollouts spread and the lockdowns end.

That was certainly the view of Mr. Powell on Tuesday when he replied to Senator Pat Toomey’s question about rising interest rates, “If you look at what the market sees, what the markets see, it’s a reopening economy with vaccinations, it is fiscal stimulus, it is a very accommodated monetary policy, it is savings that have accumulated on people’s balance sheets. It is the expectations of much higher corporate earnings that are of great importance to the stock markets. “

But why should stock prices fall when bond yields rose? Maybe it’s just a correction for inflated stocks, especially tech stocks. The less innocuous explanation, however, is that markets will see a tsunami of $ 4 trillion in US debt as the Biden spending plan moves forward. They may also see inflation ahead as business supply cannot handle a post-Covid demand boom.

We don’t know, but neither have we ever seen how the monetary and fiscal “stimuli” are currently affecting an economy that is already on the verge of a V-shaped recovery. Let’s hope it is only momentary market fluctuations.

Journal Editorial Report: Paul Gigot interviews the economist Douglas Holtz-Eakin. Image: Stefani Reynolds-Pool / Getty Images

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Published in the print edition on February 26, 2021.

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