Federal Reserve chairman Jerome Powell said on Tuesday that rising bond yields are a good sign of a return to normal, suggesting the central bank does not feel compelled to intervene further in the US Treasury bond market.
Longer-term US Treasury bond yields have risen over the past few weeks at the 10-year rate (^ TNX) rose 38 basis points to 1.39% and the 30-year (^ TYX) by 42 basis points to 2.22% since the last Fed decision on January 27th.
Government bond yields reduced those gains, following Powell’s testimony when the Fed chairman affirmed the central bank’s intention to be “patient” with its simple monetary policy.
“In a way, it’s a declaration of confidence from the markets that we will be robust and ultimately fully recover,” Powell told the Senate Banking Committee.
Bond yields usually increase when investors are willing to take more risk. US Treasuries are seen as a safe haven and relatively risk-free asset, and higher bond yields indicate lower demand as investors look more aggressively for returns in other asset classes.
The Fed chairman added that higher returns reflect greater optimism about vaccine rollouts, which could translate into more consumer spending and higher corporate earnings when the economy reopens. However, the Fed made it clear that policy makers would not receive any support in the meantime.
“Once we get this pandemic under control we could get through this a lot faster than we feared and that would be great, but the job isn’t done yet,” said Powell.
Yield curve control
Powell’s remarks did not suggest that policymakers felt the need to lower bond yields through an instrument such as yield curve control, which the central bank operates undertakes to purchase US Treasuries a targeted term until their returns fall below the specified values.
Still, the Fed does not appear to be keen to curtail its so-called quantitative easing program. The central bank has pledged to purchase at least $ 120 billion in US Treasuries and mortgage-backed securities from agencies by the month “Substantial further progress” is being made on the recovery.
Though Powell indicated that the central bank sees enough positive data to revise GDP growth estimates for this year, Powell said he couldn’t see the past three months as strong enough to warrant a cut in QE.
“We will continue to clearly communicate our assessment of the progress made towards our goals long before the pace of shopping changes,” Powell said Tuesday.
Powell’s message: The Fed will hold its asset-buying pace and keep rates near zero for some time. The Fed has made it clear that it won’t flinch on rates if Inflation rises moderately over 2%.Powell said Tuesday that if it doesn’t persist, it would be a “good problem” to put upward pressure on inflation.
Tolerating higher inflation could give the economy more time to withdraw more of the workers excluded from the pandemic. About 10 million people were less work in january compared to prepandemic levels with Low-income families and minorities are among the hardest hit.
The next Fed policy-making meeting will be on March 16-17.
Brian Cheung is a reporter covering the Fed, the economy, and the banking of Yahoo Finance. You can follow him on Twitter @bcheungz.