Why the market is worried about Powell’s attitude towards inflation

The bond market sold out on Thursday when Federal Reserve Board Chair Jerome Powell expressed little concern about inflation and showed no signs of future policy changes.

In exchange for The Wall Street Journal, central bank leaders acknowledged that the economy is recovering from the depth of the Covid-19 pandemic. You can see some price pressure First.

But he also rejected them almost as “basic effects”. In other words, prices in the coming months will look high, but only when compared to last year. Pandemic Has begun, and inflationary pressure has dropped from the floor.

In addition to the signs of full employment, Powell said, “We want inflation to sustainably exceed 2% and we want inflation to sustainably exceed 2%.” It was.

“There are many grounds to cover before reaching that,” he added.

Bond market Sold out during his comment, Send higher yield because price and yield move in opposite directions. Stock prices have also fallen, with 30 Dow Jones Industrial Averages falling by more than 600 points.

Inflation is kryptonite for bond markets for several reasons.

First, inflation erodes bond capital as rising yields struggle to keep up with price pressures and generally fail. Higher yields mean lower prices.

In addition, if inflation rises, it means that future interest payments received to hold bonds will be less valuable.

Powell said the recent leap in yields was “notable and eye-catching,” but didn’t sound any warning. Instead, he said he was only concerned about the “chaotic situation” of the market, not showing that even the highest yields before the pandemic began.

Even if inflation rises, Powell and other Fed officials will push inflation above the 2% target until the job market shows a complete and comprehensive recovery in line with income, gender and race. He says he is happy with that.

Wall Street was looking for signs of policy adjustments from the Fed. Some economists and investors aren’t asking for rate hikes, but for the Fed to change the composition of their monthly asset purchases.

One option is to sell short-term bills, buy longer-term bonds, raise short-term yields, and further lower maturities to flatten the yield curve. A process known as an operation twist..

Investors are concerned that the Fed may need to catch up again with rate hikes in the event of inflation. Equity market investors also hate rising interest rates as they become more expensive to borrow or risk companies with debt that have become dependent on low interest rates.

“When it comes to fiscal conditions, it’s up to the Fed to tighten further. The more doves face market expectations for rising inflation, the more doves will tighten,” said chief Peter Bockbar. Said. Head of Investment for the Brigley Advisory Group.

Fed officials are “in a difficult situation,” he added, and must expect inflation to fall short of the 2% target before employment reaches its target.

“If so, they have a problem because they are afraid to confront it at a higher rate if they continue to focus so much on employment,” he said.

Why the market is worried about Powell’s attitude towards inflation

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