The Fed sees rising bond yields, inflation expectations as a potential win

(Reuters) – Recent US bond yields and market inflation expectations have dented the expectations of Federal Reserve officials, with the central bank taking a new monetary policy outlook and if Democratic-led If Congress spends more, it can be further boosted.

“I am encouraged to see an increase in market indicators of inflation expectations. … This is what we are trying to support, ”Richmond federal president Thomas Berkin said in an interview with Reuters on Thursday.

Barkin said he considered the recent rise in interest rates on Treasury bonds as part of a “reflex trade”, a sign that investors seek higher interest rates rather than representing a worrisome situation for financial reasons Were confirming future increases in prices in their decisions. Conditions.

“Materials are in place for higher inflation,” St. Louis Fed President James Bullard said in separate comments to reporters. You now have a very powerful fiscal policy with Democrats about controlling the White House as well as the US Senate and House of Representatives.

“You have a Fed that… wants to temporarily keep inflation above target. Bullard said, “After realizing the impact of the pandemic vaccine, you have affected the economy because of the boom at the end of the pandemic.” The yield on the 10-year Treasury surpassed 1.07% on Thursday, reaching its highest level since March. The 5-year forward inflation expectation rate was about a two-year high of 2.05%.

‘Confidential Delivery’

After nearly two years of study, in August the Fed changed its approach to monetary policy to allow for higher inflation, allowing prices on average to accelerate for some time to reduce inflation on its own. Expecting to meet the 2% target was weakened.

It also allows, in theory, a lower unemployment rate since the central bank will try to maintain a “hot” economy leading to rising prices.

There was greater uncertainty about the economy and more “clarity” of what Barkin had said since the epidemic course last summer, where things stand – with the delivery of two coronavirus vaccines, helping many American families Fiscal buffer space for. And consumers are “not far away” from the point when they will “engage in the economy with much greater confidence.”

The pace of vaccine delivery will play a big role when this happens, frustrating the efforts of some policymakers so far.

Philadelphia Fed President Patrick Harker called the early American vaccination figures, which so far had fewer than 5 million vaccinations, “incredibly disappointing.”

But the events of the past few weeks seem to have changed market bets about the future, with trades in inflation-linked securities expected to lead to higher inflation and admit the Fed will not stand in its way.

“We are looking at a longer period where Fed funds will essentially stay at zero,” Harker said, referring to the central bank’s overnight interest rate. He said he did not find any indication that “inflation is going to be out of control.”

In fact, Chicago Fed President Charles Evans expressed more skepticism about impending inflation, even with additional government stimulus to help fight the economic collapse of the epidemic and the recession that triggered it Can.

He said that on Thursday a banker group said that to boost inflation from fiscal spending, “I’m not as strong as I would like.” He said he believed inflation would not reach 2% by 2023, and it would not be unreasonable for the Fed to wait until mid-2024 before raising short-term rates from their current near-zero levels.

San Francisco Fed President Mary Daly said at an event hosted by the Manhattan Institute’s Shadow Open Market Committee on Thursday that she believed a strong labor market would eventually lead to higher inflation, though upward on prices from a tight job market The probability of increase was weaker than in the past, there was no possibility of sudden increase.

That means, he suggested, the Fed could allow the job market to strengthen stronger than it might have in the past.

At the same time, Daly said she was confident of an improvement in inflation expectations, which gave market participants, families and businesses confidence that the Fed would reach its target to keep an eye on 2% inflation.