Federal Reserve Chairman Jerome Powell didn’t seem to satisfy anyone on Thursday.
In a closely watched speech, Powell said that the bond market sell off of the past few weeks has his attention and the central bank would not sit back and let the financial market conditions tighten broadly. However, Powell took no concrete steps and stocks sank and long-term Treasury yields spiked in the wake of his remarks.
“I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals,” Powell said during a Wall Street Journal webinar. That was a change from last week where Powell said he welcomed rising long-term bond yields.
Markets are worried that President Joe Biden’s $1.9 fiscal stimulus plan will overheat the economy and cause inflation.
Powell said that the Fed would be “patient” with higher inflation, saying it was likely to be a “one time” effect and not price gains that continue year-after-year.
Powell repeated that the Fed was a “long way” from its goals of maximum employment and stable 2% inflation.
Stocks fell in choppy trade after Powell’s comments with the Dow Jones Industrial Average
DJIA,
-1.40%
trading 101 points lower.
Yields on the 10-year Treasury note
TMUBMUSD10Y,
1.540%
climbed 7.3 basis points to 1.543%, around the highest level of the year. Yields have risen from under 1% this year.
Earlier this week, Fed Governor Lael Brainard was the first Fed official to express concern about rising bond yields. That led to speculation of Fed action to push rates lower.
Powell said that the bond market turmoil last week had caught his eye but said he wasn’t watching one interest rate in particular but was looking at financial conditions more broadly.
The Fed has said they expect to keep the policy interest rates near zero until the economy has reached maximum employment and inflation has risen to 2% and is on track to moderately exceed that level for some time
Powell said this guidance is “pretty specific.”
“It is a picture of an economy that is all but fully recovered. That’s going to take some time,” he said.
Markets are pricing the first Fed rate hike in 2023. Fed officials in December didn’t see a first hike until 2024. Officials will update their forecasts and release them at the Fed’s next interest-rate committee meeting on March 16-17.
The central bank said it will continue buying $80 billion of Treasurys per month along with $40 billion of mortgage backed securities until there is “substantial further progress” has been made towards its goals.
The Fed is buying Treasurys along the yield curve. Asked if the Fed “had seen anything in the Treasury market” to suggest concentrating purchases on the longer-end, an operation known as a “Twist,” Powell replied: “We think our current policy stance is appropriate.”
He said that if conditions change materially, the Fed “is prepared to use the tools that it has to foster achievement of its goals.”
“The market reaction to Powell, including a rise in long-term yields, likely reflects some confusion about how the Fed works. Some people thought Powell would commit to policy action — specifically an Operation Twist extension of maturities in the Fed portfolio — today. But, come on, the Fed Chair would never announce operation twist at a corporate sponsored event, especially two weeks before an FOMC meeting,” said Christopher Low, chief economist at FHN Financial.
Fed officials will enter a self-imposed blackout on Saturday and will not make any public remarks until after their March 16-17 meeting.
