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Powell stays calm – and alarms global markets

(ATF) Federal Reserve chairman Jerome Powell took a calm approach to recent Treasury volatility on Thursday March 4, prompting another spike in bond yields and selling of tech stocks.

The benchmark 10-year US Treasury yield rose to close Thursday at 1.56% – close to the 1.61% level hit during a wave of panic selling a week ago – after Powell repeated his pledge to keep monetary policy easy but failed to announce any new steps to address the recent upward drive in government bond rates.

“There is good reason to think we will make more progress soon,” toward the Fed’s goals of maximum employment and 2% sustained inflation, Powell told a Wall Street Journal forum.

“I want to be clear about this,” Powell said, repeating the Fed’s promise to keep its near zero interest rates and monthly bond buying intact. Even if retail prices jump as anticipated this spring, “I expect that we will be patient,” and not change monetary policies that need to remain supportive until the economy is “very far along the road to recovery,” Powell said.

His public comments are expected to be the last before a press conference on March 17 following the Fed’s next two day policy meeting.

Powell dismissed concern that a recent rise in Treasury yields was a problem for the central bank’s goal of keeping rates low.

While Powell said the increase was “notable and caught my attention,” he did not consider it a “disorderly” move, or one that pushed long-term rates so high the Fed might have to intervene in markets more forcefully to bring them down, such as by increasing its $120 billion in monthly bond purchases.

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

Some analysts thought Powell in his remarks might refer to the Fed’s ability to intervene and increase its bond buying if long-term yields keep rising – in a form of qualitative yield curve control.

Yield jump seen as confidence in recovery

But Powell and other Fed policymakers have made it clear that rather than viewing the run-up in bond yields – which has taken the benchmark 10-year Treasury yield to levels not seen since before the pandemic began last year – as a sign of potentially damaging inflation expectations, they see it pointing to confidence in a recovery that has not had much effect on the broader financial conditions the Fed is monitoring.

“We don’t want to see a persistent tightening in broader financial conditions, that’s really the test,” Powell said, indicating that the broader context remains healthy.

The Fed still sees inflation as a minimal risk, and has put more weight on achieving and maintaining maximum employment, the second of the two goals set for it by law.

“We are committed to staying on the playing field until the job is done. there is still a lot of pain out there,” Powell said.

His measured tone did nothing to reassure Wall Street and the renewed Treasury spike pushed down technology stocks on Thursday.

Nasdaq, Dow both down as tech stocks fall

The Nasdaq wiped out all of its year-to-date gains and ended down 9.7% from its record closing high on February 12. The S&P 500 has declined over 4% from its record high close on the same day.

The fall took the Nasdaq close to the 10% dip that is generally viewed as a correction.

The S&P 500 energy sector index, by contrast, jumped 2.5% and reached a one-year high on the back of higher oil prices.

The Dow Jones Industrial Average fell 1.11% to end at 30,924.14 points, while the S&P 500 lost 1.34% to 3,768.47.

The Nasdaq dropped 2.11% on the day to 12,723.47, completing the fall of 9.7% since mid February.

Most technology stocks on both the S&P and Nasdaq fell, with Tesla dropping almost 5%.

Asian markets could come under further pressure on Friday on concern that a rise in Treasury yields could develop fresh momentum and produce disorderly selling in tech stocks, though the focus on global market fundamentals is also increasing interest in assets that are relatively stable and already offer decent returns, such as Chinese corporate bonds.


Jon Macaskill

Jon Macaskill has over 25 years experience covering financial markets from New York and London. He won the State Street press award for 'Best Editorial Comment' in 2016


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