A man with a face mask walks past the US Federal Reserve in Washington, DC, USA on December 2, 2020.
Liu Jie | Xinhua News Agency | Getty Images
The US Federal Reserve will soon not step in to curb rising inflation, market observers said, despite rising yields raging global stock markets.
Inventories have been pegged to rising treasury yields over the past week and the possibility that the Fed will tighten monetary policy to address the expected rise in inflation.
Fed Chairman Jerome Powell acknowledged on Thursday that there could be some upward pressure on prices as the economy reopened, pointing out that he expects the central bank to be ‘patient’ about policy action, even if the economy ‘short-term increase in inflation’.
Although the Fed has consistently promised to keep its monetary policy accommodating, it is suggested that employment and inflation are still far below target, but Powell’s comments have pushed the US Treasury’s standard yield above 1.5% for ten years and drop global stock markets. That return reached an intraday high of 1.626% on Friday after a solid job opportunities report.
“Market surveillance can shout anything they want, but for now, the Fed is not going to turn around. Maybe it will change if the bond markets become disorderly enough to increase credit spreads, but that’s not happening yet.” Kit Juckes, Societe Generale’s global head of foreign exchange strategy, said in a research note.
“If it does not succumb to every whim of the stock market held hostage by every faltering risk sentiment, it reflects the awareness of the bigger picture – overvalued stock markets are more dangerous than slightly higher bond yields,” he said.
The Fed referred to conditional guidance and promised to consider the underlying data, as it looks like the economy should emerge from the coronavirus crisis.
“Their projections for the economy suggest that inflation, after an eruption this year, will fall back to the target in 2022, and that the labor market must be very hot in a more comprehensive way than we have seen in the past to to intensify policy, ”said Francesco Garzarelli, head of macro research at Eisler Capital.
Garzarelli told OilGasJobz’s Street Signs Europe on Friday that the rise in the yield curve is in line with the Fed’s current framework for adjusting to incoming data rather than working according to forecasts, especially as positive news about vaccinations and fiscal stimulus is taken into account.
“What stops it, I think, here is the Fed wanting full control over the front of the curve, and I think it could come out if the situation becomes very noisy to sharpen its lead at the front,” he said. adding that the central bank would probably not tamper with the long end of the curve. The front of the curve refers to short-term debt securities, rather than bonds with a longer date.
Powell stressed on Thursday that the rise in bond yields and negative market reaction were not seen by the central bank as a “disorderly” that would require direct intervention.
Charalambos Pissouros, senior market analyst at JFD Bank, also noted that the Fed is prepared to exceed its short-term inflation target of 2% for a few months, hoping to stabilize further.
“As a result, we expect fears of high inflation to ease in the foreseeable future, which could cause equities and other risk-linked assets to bounce back,” he said in a note on Friday.
“As for the dollar, it could come under selling interest with more signs that the Fed is likely to stay accommodating longer than previously agreed.”
Meanwhile, Santa Lucia’s asset management James Morton believes the Fed is likely to adjust its policies soon as inflation and yields continue to rise.
“After all, the US government is the biggest debtor and they can’t afford higher interest rates,” Morton told OilGasJobz ‘Capital Connection’ on Friday.