Jerome Powell, chairman of the Federal Reserve, makes his semi-annual appearance on Capitol Hill this week. Investors have some questions, and so do Congressmen.
The first is about what Powell thinks is happening in markets, especially returns that are rising again. The yield on the 10-year treasury note – the most important price in the world economy – rose on Monday to 1.37% from 0.917% at the beginning of the year. The ten-year German bond, the benchmark of the eurozone, reached 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%.
This is undoubtedly in part a healthy response to good pandemic news. Falling cases count in the US, UK and other vaccine leaders to see the light at the end of the exclusions. Bond investors expect growth to revive, and rising returns point to faster growth. If this is correct, you can expect economic optimism to continue to increase yields, despite the Fed’s short-term target and short-term asset purchases.
But Mr. Powell has made extraordinary efforts to keep yields low, so how does he view the recent effects? Is it healthy, and is he satisfied that investors are best advised about recovery? Or is he planning to fight investors, perhaps with a version of the Japanese rate of return control that will set interest rates per fiat over longer maturities? If so, why?
A less benign reading of the bond price development is that investors expect the combination of economic recovery, loose monetary policy and a fiscal outburst from the Biden administration to cause inflation. An early warning could be last week’s report of a 1.3% increase in producer prices in January, with a peak after 2009.