Federal Reserve Chairman Jerome Powell makes his semiannual appearance on Capitol Hill this week. Investors have a few questions, and so should Members of Congress.
The first concerns what Mr. Powell thinks is happening in markets, especially bond yields that are rising again. The yield on the 10-year Treasury note—the most important price in the global economy—surged to 1.37% Monday from 0.917% at the start of the year. The German 10-year bund, the eurozone’s benchmark bond, on Monday hit an eight-month high of minus-0.28%, after rising 12 basis points last week. Japan’s 10-year government bond reached a two-year high of 0.12%.
No doubt this is in part a healthy response to good pandemic news. Falling case counts in the U.S., U.K. and other vaccine leaders are bringing the light at the end of the lockdowns into sight. Bond investors expect growth to revive, and rising yields signal faster growth. If this is correct, expect economic optimism to push yields still higher despite the Fed’s near-zero short-term rate target and aggressive asset purchases.
But Mr. Powell has gone to extraordinary lengths to keep yields low, so how does he view these recent bond movements? Is this healthy, and is he content for investors to make their best guesses about the recovery? Or does he intend to fight investors, perhaps with some version of Japanese-style yield-curve control that would set rates by fiat at longer maturities? If so, why?
A less benign reading of bond-price trends is that investors expect that the combination of economic recovery, loose monetary policy and a fiscal blowout from the Biden Administration will stoke inflation. An early warning might be last week’s report of a 1.3% January increase in producer prices, a post-2009 high.