How will the Fed calm inflation fears today?

When Fed Chairman Powell takes the podium at a virtual press conference on Wednesday to discuss the US central bank’s final thinking on monetary policy, he will speak directly to Wall Street.

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Yields on 10-year US Treasuries rose to nearly 1.6%, close to a one-year high, in anticipation of faster economic growth with the launch of the coronavirus vaccine. The $ 5 trillion economic stimulus packages not only raised the US government’s indebtedness to record levels, but investors are demanding higher returns on Treasury bills to offset the risk of inflation.

Wall Street analysts worry that higher bond yields could lead to a correction in the prices of risky assets, from stocks to bitcoin. So the question is whether Powell will allow bond yields to continue rising, or whether the Fed will step in to prevent any unwanted responses from the market. Options range from tightening monetary policy to addressing inflation risk to deploying the central bank’s money machine in new ways to avoid higher returns.

“Markets don’t trust the Fed,” said Claudia Sahm, a former Fed economist and principal investigator. The Fed will have a big test for this year and next. “This will be the most complicated monetary policy practice since the ‘Volcker Rule’ of bank risk taking after the 2008 financial crisis,” he says.

Fed officials are testing empirical monetary policies with names like “Operation Twist” or “yield curve control.”

Steven Kelly, a research assistant for Yale’s Financial Stability Program, an initiative focused on understanding financial crises, said Powell is unlikely to announce a new policy on Wednesday.

“It could be more moderate. “They can add language to the statement, saying they are ready to use all the necessary tools,” Fed officials say.

Sahm also said the Fed is unlikely to use previously unused monetary policy tools before increasing the size of the asset purchases currently in place.

The Fed was buying $ 120 billion in US Treasury bills a month for most of last year, in an effort to stimulate the economy by cutting yields. The additional buying volume from the Fed helps reduce yields as bond prices move in the opposite direction to their yields. This helps keep interest rates low on everything from business loans to 30-year residential mortgages.

Oxford Economics US financial economist Kathy Bostjancic believes the Fed could shift some of its purchases of Treasuries to longer maturities.

“In December, when I calculated the average maturity of Fed purchases, it was 7.4 years,” Bostjancic said. So they can start to change this to 10-, 20-, and 30-year bond purchases. “

Bostjancic added that Oxford Economics has revised its GDP forecast for the United States from 3.2% to 7% this year and that the United States will overtake China in economic growth.

Powell says when restrictions are lifted and people start leaving, when new jobs are created, when wages go up as competition for workers increases; that is, you may have to consider how prices and markets will react when the economy warms up again.

According to Sahm, these “stifled demand” narratives are “exaggerated” by market commentators who see the increased risk of inflation.

He expects Federal Reserve officials to expect future inflation forecasts in the revised “Economic Forecast Summary,” which is expected to be released on Wednesday, likely above 2%, but well below 3%.

This is far from the double-digit inflation levels that some analysts warned about in the late 1960s and early 1970s.

Bostjancic commented that “certain parts of the market are risky and valuations like the stock market and also commercial real estate are increasing,” Bostjancic said. “I don’t think the central bank is targeting this. CRYPTOCURRENCY [hedeflemeye] they won’t work. Long-term [tahvil] “If we had a moderate increase in interest rates, which is a natural break for some of these riskier assets, they probably wouldn’t care,” he adds.

Yahoo Finance

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