In his second day testifying for the Senate Banking Committee alongside Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell on March 24 expressed he was not concerned about rising bond yields that have hampered both investor and consumer views of the economy.
“It seems that rates have responded to news about vaccination and ultimately about growth,” Powell said in the hearing, treating the rise with optimism.
Powell and Yellen jointly testified to the committee this week regarding various government efforts to restore the economy to full health amid the ongoing COVID-19 pandemic.
The yield on 10-year Treasury notes held at 1.64% on Wednesday, up from 0.92% at the beginning of the year but down from its peak last week of 1.76%. Economists and analysts have expressed worries about the rate climbs, saying they could weigh the economy down by making it harder for consumers and businesses to borrow.
The 10-Year Treasury yield curve, a major economic indicator that shows the relationship between the interest rate and borrowing period of a bond, briefly rose to a 13-month high of 1.67% the morning of March 17 before the Federal Reserve’s second meeting of the year, where the Fed announced it would continue to hold interest rates at near-zero until at least 2023.
The yield curve measures bond investors’ views of economic risk. Short-term bonds carry lower yields in normal economic conditions to reflect that an investor’s money is at less risk. In comparison, longer-term bonds have higher yields due to a greater likeliness of a borrower defaulting, adhering to a commonly assumed “more risk, more reward” investor sentiment.
The yield curve inverted in August 2019, indicating that it forecasted a 2020 recession. It has been upward-sloping since global lockdown guidelines took effect last March, a sign that the economy is recovering during the recession.
In his testimony, Powell stressed that the economy’s improving performance – ranging from upticks in retail sales, home sales, household savings, and a drop in unemployment rates – has come from “extraordinarily low levels” and that he would be concerned only if economic conditions were to tighten.
Both Powell and Yellen expressed sentiment reflective of their testimony on March 23 when they said the economy would recover strongly but that, given hindrance in the labor markets, it will take time before economic conditions are synched to pre-COVID levels.
Republican Sen. Pat Toomey of Pennsylvania, the top Republican on the Senate panel, expressed that the Fed is taking a lazily dovish stance on its low interest rate decisions – which have prevailed for the past year in efforts to spur the economy back to life – and that the central bank “will be behind the curve when inflation picks up.”
“In the near term, we do expect, as many forecasters do, that there will be some upward pressure on prices,” Powell replied. “Long term, we think that the inflation dynamics that we’ve seen around the world for a quarter of a century are essentially intact. We’ve got a world that’s short of demand with very low inflation…and we think that those dynamics haven’t gone away overnight and won’t.”
In a press conference on March 17 following the Fed’s second meeting of the year, Powell said the Federal Open Market Committee (FOMC) projects the inflation rate to be 2.4% for 2021, but a decrease to roughly 2% is expected sometime next year. He added the Fed plans to enact policy that averages inflation towards the central bank’s goals in the coming month. He told reporters not to scrutinize too much about inflation targets.
In previous meetings and conferences, Powell did not heavily opine on inflation. In his Feb. 24 testimony to the House Financial Services Committee, he said that “inflation dynamics do change over time” but that they “don’t change on a dime.”
From prepared statements for both hearings, Mr. Powell said the Fed “will continue to provide the economy the support that it needs for as long as it takes.”
The Federal Reserve does not plan to raise interest rates until the economy reaches full employment and inflation rises moderately above its 2% target.
Powell said on March 23 he does not expect the recently passed $1.9 trillion stimulus package to push inflation figures up and added that the Fed has the tools necessary to combat any inflation that arises.
“We might see some upward pressure on prices. Our best view is that the effect on inflation will be neither particularly large nor persistent,” he said.
ING Economics analysts wrote in a March 19 note that “a more meaningful change in the Fed’s language” would manifest during the FOMC’s June meeting, predicting that a new view of economic forecasts will present itself as Covid recovery further develops.
“Such discussions would likely add to the upside pressure on Treasury yields and could generate another ‘taper tantrum,’ but the economy should be in a much stronger position to weather it by then,” the note said.
As part of the Cares Act passed last March under former President Donald Trump, Powell and Yellen are required to testify once a quarter to explain how their respective U.S. finance entities are handling the economic effects of the pandemic.
