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This week the market is nervous about Powell’s testimony

Federal Reserve Board Chair Jerome Powell spoke at a Senate Banking Commission hearing on December 1, 2020 in Capitol Hill, Washington.

Aldrago | Pool | Reuters

Rising bond yields and the associated inflationary concerns have raised the level of drama by the Fed chair. Jerome PowellAppearance before Congress this week.

The central bank chair will address the Senate and House panels daily as part of a mandatory semi-annual update on monetary policy.

Due to normal day-to-day operations, recent financial market turmoil, and concerns about the Fed’s reaction, investors are paying a little more attention to hearings scheduled for Tuesday and Wednesday.

“This is one of the more interesting episodes the Fed chair had to testify,” said Nathan Sheets, chief economist at PGIM Fix Income. “Sometimes I say,’Hmm, no news.’ This will be news. He’s really sandwiched between rocks and hard places.”

What has been attracting the attention of the market recently Rising government bond yields, Especially outside the curve.

The two years of 2021 remain unchanged, but as of Friday’s market closing, five years rose almost a quarter percentage point, and benchmark 10-year bond yields rose 41 basis points to 1.34%. .. Not from about the same time in 2020, before the worst pandemic.

Yields on 30-year bonds rose even further this year, rising about 0.5 points to 2.14%.

Powell’s dilemma is this: rising bond yields Economic reflation Promoted by the Federal Reserve Board, and therefore higher for good reason. However, if the trend goes out of control, the Fed may have to tighten its policies faster than the market expects, offsetting some of the goods associated with the surge in yields.

Complicating the matter is that if Powell is overly complacent, the market may not like it either.

“I think Jay Powell is very happy with what he sees in the economy and the market if this testimony is given in a closed room,” said Fed Chairman’s nickname. “But given that it’s open, he must be careful. If he’s too optimistic about rising interest rates, the market will make it an important green light for interest rates to rise. Would consider it as. “

“The Fed is happy with the organic rise in interest rates, which reflects a changing view of growth and inflation,” he added. “But the Fed also wants to be careful not to create or amplify self-sustaining dynamics that boost rate hikes for other reasons.”

These “other reasons” are primarily due to the risk of overheating of the economy.

Stimulus and more stimulus

The Federal Reserve Board has historically implemented loose policies over the past year, lowering benchmark borrowing rates to near zero and buying at least $ 120 billion in bonds each month. This is in addition to the initial set of post-expiration lending and liquidity programs. COVID-19 crisis.

In addition, Congress has introduced over $ 3 trillion in fiscal stimulus and could approve up to $ 1.9 trillion by the weekend.

Everything that happened in the economy Employment problems still having problems I’m humming mainly in the service department. Wall Street is embracing growth expectations for the first quarter and market-based inflation indicators are rising.

That’s why this week’s Powell tightrope walk will be even more appealing.

“The mood of the market has changed” Mohamed EllerianAllianz Chief Economic Advisor said on Monday at CNBC’sSquawk Box“It’s not when yields are rising, but when the movement is too big. That’s what the market is trying to figure out.”

Investors are particularly concerned Whether all stimuli are outboard It can destabilize the economy in the long run.

“You can expect the yellow light to flash across the Fed. [yields] The movement and the steepness of the yield curve, and the Fed may do more to try to control the yield. “

The Federal Reserve Board has largely rejected the so-called yield curve management, which uses the purchasing power of bonds to control interest rates at maturity of various bonds.

However, the market could force the Fed’s hand, and Powell could be asked where he stands about the tools the Fed needs to calm market problems. He repeatedly emphasized that central banks have weapons to control inflation, but deploying them comes at a price. Markets accustomed to low yields and companies accustomed to low borrowing costs can rattle due to unexpected federal movements.

Evidence of how clearly the market is monitoring this issue was given by the President of the European Central Bank on Monday morning. Christine Lagarde “We are closely monitoring long-term nominal bond yields,” she said. Her words were enough to calm the volatile market and turn what was the first loss on Wall Street into a mixed market with the Dow in an early afternoon deal. On that day, the Treasury yield was almost flat.

“Clients have already expressed some concern about this week, some of which are steadily rising bond yields and equity investors,” said Tom Lee, Managing Partner and Head of Research at Fundstrat Global Advisors. Reflects the nervousness of the bond market. During Powell’s testimony, some sort of “limit” may be reached.

Powell speaks in front of the Senate Finance Committee on Tuesday and to the House Finance Committee on Wednesday.

This week the market is nervous about Powell’s testimony

Source link This week the market is nervous about Powell’s testimony

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