Fed sees rising bond yields, inflation expectations as a possible victory

(Reuters) – A recent rise in US bond yields and market inflation expectations has bolstered Federal Reserve officials’ hopes that the new approach to central bank monetary policy will become valid and could be further supported if a Congress led by a Democrat will launch more spending.

“I am encouraged to see the growth of market indicators of inflation expectations. … That’s what we’re trying to say, “Richmond Federal President Thomas Barkin said in an interview with Reuters on Thursday.

Barkin said he saw a recent rise in interest rates on treasury bonds as part of a “rebate transaction”, a sign that investors are considering future price increases in their decisions, demanding higher interest rates, more rather than representing a worrying concern of the condition.

“The ingredients for higher inflation are in place,” St. Louis Fed Chairman James Bullard said in separate comments to reporters. “You have a very strong fiscal policy in place and maybe more,” with Democrats to control the White House, as well as the U.S. Senate and House of Representatives.

“You have a Fed that … wants to temporarily have inflation over its target. You have the economy ready to explode at the end of the pandemic, “once the impact of the new coronavirus vaccines is felt, Bullard said.

The 10-year benchmark Treasury yield rose more than 1.07% on Thursday, reaching its highest level in March. The anticipated 5-year inflation rate reached a two-year high of 2.05%.

“INCREDIBLY DISCOVERABLE”

After nearly two years of study, the Fed in August changed its approach to monetary policy to allow for higher inflation, hoping to reach its 2% target on average, allowing prices to go longer to offset. the years when inflation had been weak.

This would theoretically allow for a lower unemployment rate, as the central bank would try to support the kind of “hot” economy that leads to higher prices.

Massive uncertainty about the economy and the evolution of the pandemic at the end of last summer gave way to where Barkin said there was more “clarity” about the situation – with the distribution of two coronavirus vaccines, tax buffers to help many households consumers, and consumers “not far” from the moment they will “engage in the economy with much more confidence.”

The pace of vaccine distribution will play an important role when this happens, with some political factors expressing dismay at the effort so far.

Philadelphia Fed Chairman Patrick Harker called the first vaccination figures in the United States, with less than 5 million inoculated so far, “incredibly disappointing.”

But events in recent weeks appear to have changed market stakes for the future, with inflation-linked securities trading suggesting that investors expect higher inflation and accept that the Fed will not stop it.

“We are looking at a long period in which the rate of funded funds will remain essentially zero,” Harker said, referring to the central bank’s main overnight interest rate. He added that he saw no signs that “inflation will get out of hand.”

Indeed, Chicago Fed Chairman Charles Evans has expressed more skepticism about the inflation that will follow, even with the additional government stimulus that could be on the way to helping fight the economic downturn of the pandemic and the recession it triggered.

The rise in inflation from added tax spending, he told a group of bankers on Thursday, is not “nearly as strong as I would like.” He said he believes inflation will not reach 2% by 2023 and that it would not be unreasonable for the Fed to wait until mid-2024 before raising short-term rates from their current levels to near zero.

San Francisco Fed Chairman Mary Daly at a Thursday event hosted by the Manhattan Institute’s Shadow Open Market Committee said he believes a stronger labor market will lead to higher inflation, although it is likely as the upward rise in prices in a tight labor market weaker than in the past, making it unlikely to rise sharply.

This means, she suggested, that the Fed can allow the job market to consolidate more than it could in the past.

At the same time, Daly said she was reassured by a recovery in inflation expectations, which showed market participants, households and businesses are beginning to believe that the Fed will meet its 2% inflation target.