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Powell Sends Dovish Message That Leaves Bond Market Disappointed


By Rich Miller and Catarina Saraiva


  • Fed chair says there’s a lot left to do before economy healed

  • Treasury prices slip and yields rise in response to comments

Federal Reserve Chair Jerome Powell sounded a gentle word of caution to the bond market on Thursday that he’s watching the jump higher in long-term interest rates, but stopped well short of trying to rein them in.

The recent run-up in bond yields “was something that was notable and caught my attention,” he told a Wall Street Journal webinar. “I would be concerned by disorderly conditions in markets or persistent tightening in financial conditions that threatens the achievement of our goals.”

Bond yields have climbed in recent weeks on mounting expectations of stronger economic growth and faster inflation after the pandemic ends. Trading has been turbulent at times as dealers have struggled to keep up with the order flow. The higher yields have also unsettled the stock market, particularly shares of high technology companies.

Powell repeatedly sought to reassure the skittish markets that the Fed was nowhere close to pulling back on its massive support for the economy, even as he voiced hopes of better economic times ahead.

“We will be patient,” he said. “We’re still a long way from our goals.” Powell’s remarks are among the last from a U.S. central banker before the Fed enters its blackout on public comment ahead of the March 16-17 policy meeting.

Ten-year Treasuries extended losses and inflation expectations reached new session highs as Powell spoke, with some traders disappointed that the Fed chair didn’t provide an specifics on what the central could possibly due to tamp down long-term rates if they desired. The dollar continued higher and U.S. shares fell further.

In a note to clients, Krishna Guha, vice chairman at Evercore ISI, had this to say about the Fed chair’s performance: “Powell stays dovish but not dovish enough to prevent further increases in yields.”

The Fed chief stressed that the Fed was not focused on bond yields per se but rather on financial conditions more broadly.

“Financial conditions are highly accommodative and that’s appropriate given the ground the economy has to cover,” he said. “If conditions do change materially, the committee is prepared to use the tools that is has to foster the achievement of its goals.”

He declined to be drawn on what that might entail, including whether the Fed would resurrect “Operation Twist,” a maneuver which would involve eliminating its holding of Treasury bills and putting the money in longer-term securities to try to bring down bond yields.

“Our current policy stance is appropriate,” he said.

The Fed has said it will keep short-term interest rates pinned near zero until the labor market has reached maximum employment and inflation has risen to 2% and is on track to moderately exceed that level for some time.

As the economic outlook has improved, investors have moved forward their expectations for the first Fed rate hike to early 2023.

Asked if the shortened time-frame was consistent with the Fed’s thinking, Powell said it would all depend on what happens to the economy. But he suggested that an increase was a long ways off.

“It is a picture of an economy that is all but fully recovered,” he said, of the conditions the Fed has set for lift off. “Realistically, that is going to take some time.”

Powell played down fears that the Fed’s ultra-easy monetary policy and significantly stepped-up government spending would lead to an unwanted surge in inflation.

Price Rises Temporary

In answer to questions about those concerns, Powell said it’s more likely that prices move up in the next year but don’t stay up, “and certainly not staying up to the point where they would move inflation expectations materially above 2%.”

The Fed chair expressed optimism for U.S. jobs while reiterating that there’s still a long way to go as the economy recovers from the pandemic.

“While there are still risks, there’s good reason to expect job creation to pick up in coming months,” he said.

Powell said he didn’t think the labor market would return to maximum employment in 2021.

The pandemic-damaged economy has shown pockets of strength at the start of the year. Retail sales surged in January by the most in seven months, while manufacturing expanded in February at the fastest pace in three years.

The jobs market has lagged, with claims filed for unemployment benefits stuck at historically very elevated levels. Payrolls barely rose in January, by 49,000, after a 227,000 decline in December. A new reading on the jobs market will come on Friday, with the release of the monthly employment report for February.

— With assistance by Liz McCormick, Craig Torres, and Matthew Boesler

(Recasts lead, updates with reference to start of FOMC blackout.)

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