A man wearing a face mask walks past the Federal Reserve on December 2, 2020 in Washington, DC, United States.
Liu Jie | Xinhua News Agency | Getty Images
The US Federal Reserve will not step in any time soon to ease rising inflation, market watchers have said, despite rising yields that have shaken global equity markets.
Stocks were pegged for the past week on rising government bond yields and the possibility that the Fed will tighten monetary policy to counter an expected spike in inflation.
On Thursday, Fed Chairman Jerome Powell admitted that “some upward pressure on prices” could occur as the economy reopens, noting that the central bank will be “patient” with policies, even if the economy is “temporary.” Increases in inflation “sees.
Although the Fed has consistently vowed to keep its monetary policy accommodative, and proposed employment and inflation are still well below target, Powell’s comments have pushed the benchmark 10-year US Treasury bond yield back above 1.5% and rocked global stock markets. That return hit an intraday high of 1.626% on Friday after a solid employment report.
“The bond market vigilantes can shout whatever they want, but right now the Fed has no plans to twist it. Perhaps that will change if bond markets get disordered enough to cause credit spreads to widen, but that’s not yet happening.” Kit Juckes, the global head of foreign exchange strategy for Societe Generale, said in a research note.
“Perhaps it reflects an awareness of the bigger picture not to give in to every whim of the stock market that is held hostage by any shaky risk sentiment – overvalued stock markets are more dangerous than slightly higher bond yields,” he said.
Inflation will slide back towards the target in 2022
The Fed has been referring to conditional projections and promised to consider underlying data to help steer the economy out of the coronavirus crisis.
“Their projections for the economy suggest that after a breakout this year, inflation will fall back towards target in 2022 and that, more broadly than has been seen in the past, the labor market must be very hot for them to begin tightening policies “said Francesco Garzarelli, head of macro research at Eisler Capital.
Garzarelli told CNBC’s Street Signs Europe on Friday that the steepness of the yield curve was in line with the Fed’s current framework of adjusting to incoming data rather than forecasting, especially when considering positive news about vaccinations and fiscal stimulus would.
“What is stopping it, I think this is where the Fed wants full control of the front end of the curve, and I think it can turn out if the situation gets very noisy if it increases its lead at the front end,” said he. It is unlikely that the central bank would tinker with the long end of the curve. The front end of the curve relates to short-term debt rather than longer-term bonds.
Powell stressed Thursday that the rise in bond yields and adverse market reactions would not be viewed by the central bank as “disorderly,” requiring direct action.
Charalambos Pissouros, senior market analyst at JFD Bank, also noted the Fed’s willingness to exceed its inflation target of 2% in the short term for several months in hopes of further stabilizing later.
“As a result, we expect fears of high inflation to subside anytime soon, which could allow stocks and other risk-related assets to rebound,” he said in a statement on Friday.
“The dollar could come under selling interest on further signs that the Fed is likely to accommodate longer than previously thought.”
James Morton of Santa Lucia Asset Management believes the Fed will likely tweak its policies in the near future if inflation and yields continue to rise.
“After all, the US government is the largest debtor and cannot afford higher interest rates,” Morton told CNBC’s Capital Connection on Friday.