Questions for President Powell – WSJ


Federal Reserve Chairman Jerome Powell makes his semi-annual appearance on Capitol Hill this week. Investors have some questions, as do members of Congress.

The first concerns what Mr. Powell thinks is happening in the markets, especially bond yields that are rising again. The yield on the 10-year Treasury bond, the most important price in the world economy, rose to 1.37% on Monday from 0.917% at the beginning of the year. Germany’s 10-year bond, the benchmark eurozone bond, hit an eight-month high of minus-0.28% on Monday, after rising 12 basis points last week. Japan’s 10-year government bond reached a two-year high of 0.12%.

To be sure, this is partly a healthy response to the good news about a pandemic. The drop in cases in the US, UK, and other vaccine leaders are bringing light to the end of the lockdowns in sight. Bond investors expect growth to pick up and rising yields indicate faster growth. If this is correct, expect economic optimism to further boost yields despite the Fed’s near-zero short-term rate target and aggressive asset purchases.

But Powell has done his best to keep yields low, so how do you view these recent bond moves? Is this healthy and are you happy investors are making their best guess on the recovery? Or do you intend to fight investors, perhaps with some version of Japanese-style yield curve control that would set rates per fiduciary at longer maturities? If so, why?

A less benign reading of bond price trends is that investors expect the combination of economic recovery, loose monetary policy and a fiscal explosion from the Biden Administration to fuel inflation. An early warning could be last week’s report of a 1.3% rise in producer prices in January, a post-2009 high.

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