Federal Reserve Chairman Jerome Powell makes his semester 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 rising bond yields. The yield on the 10-year treasury bill – the most important price in the global economy – rose on Monday to 1.37% from 0.917% at the beginning of the year. The 10-year German Bund, the eurozone’s benchmark bond, hit a eight-month high of 0.28% on Monday, after rising 12 basis points last week. 10-year Japanese government bonds reached a two-year high of 0.12%.
Undoubtedly, this is partly a healthy response to the good news about the pandemic. The declining number of cases in the US, the UK and other vaccine leaders is bringing light to an end. Bond investors expect growth to revive, and rising yields signal faster growth. If this is correct, expect economic optimism to increase yields even more, despite the Fed’s near-zero short-term rate target and aggressive asset purchases.
But has Mr. Powell made a tremendous effort to keep yields low, as he sees these recent bond movements? Is it healthy and satisfied for investors to make the best assumptions about recovery? Or does he intend to fight investors, perhaps with a Japanese-style version of the yield control that would set fiat rates at longer maturities? If so, why?
A less benign reading of bond price trends is that investors expect the combination of economic recovery, weak monetary policy and a fiscal explosion from the Biden Administration to cause inflation. An early warning could be last week’s report of a 1.3% rise in January in producer prices, a peak after 2009.