Powell: ‘Notable’ Bond Yields Don’t Change Fed’s Plans

Federal Reserve Chairman Jerome Powell in December.

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While economic conditions continue to warrant keeping benchmark interest rates at virtually zero, the spike in government bond yields last week did catch the attention of Federal Reserve Chairman Jerome Powell, he said Thursday. 

Inflation-sensitive Treasury yields jumped last week amid heightened concerns that a new round of stimulus from the federal government could fuel a spending surge once the economy reopens, bringing with it soaring consumer prices. The yield on the 30-year Treasury rose as high as 2.33%, up from 2.19% at the start of the week, while the 10-year Treasury shot up to 1.54% from 1.37%.

“It was something that was notable and caught my attention, but again, it’s a broad range of financial conditions that we’re looking at,” Powell said when a Wall Street Journal reporter asked him about the spike at the Wall Street Journal Jobs Summit, an event that was live-streamed. “And that’s really the key, it’s many things... It’s not appropriate to isolate one particular interest rate or price. It’s more of a broader assessment that we make.”

Instead, Powell said, “as it relates to the bond market, I’d be concerned by disorderly conditions in markets or by a persistent tightening in financial conditions broadly that threatens the achievement of our financial goals.”

The recent fears that inflation might ramp up too much too quickly have broader implications than just higher prices at the register. If the Fed starts to see serious inflation risks, it might taper its asset purchases or raise benchmark interest rates faster than it has said it would, economists say, raising borrowing costs and potentially putting the brakes on growth before the economy has fully recovered.

For instance, while the Fed plans to keep rates near zero through at least 2023, just Thursday, BMO Capital Markets said the new risks could make that happen as soon as mid-2023, earlier than its previous forecast of 2024. 

A growing number of economists, including former U.S. Treasury Secretary Lawrence Summers, has warned that President Joe Biden’s latest stimulus proposal could fan inflation. But staying on script, Powell repeated that the country has yet to produce any of the economic conditions that would warrant a change in policy, including inflation moderately exceeding 2%, for now, or a recovered labor market. 

“There’s good reason to think we will begin to make more progress soon, but even if that happens as now seems likely, it will take some time to achieve substantial further progress” on the Fed’s goals, he said. 

Even though unemployment remains well above pre-pandemic levels (Powell said it is “not at all likely”  the labor market would reach maximum employment this year), some economists are raising their GDP growth estimates for the year based on the prospects for more stimulus and a deeper rollout of COVID-19 vaccines. Consumers sitting on soaring levels of savings could also unleash a torrent of spending once the economy fully reopens.