Fed Chair Powell

Powell Has to Choose His Words Carefully When Addressing the Rise in Yields or Rates Could ‘Rip Higher’

Federal Reserve Chair Jerome Powell is scheduled to speak before the Senate Banking Committee on Tuesday, and investors are expected to look for any potential changes to the central bank’s dovish outlook in recent months. This could be a market moving event because rising bond yields and accompanying inflation fears are adding a level of drama.

Powell is mandated to meet with U.S. House and Senate committees to update Washington on monetary policy semiannually. Normally, the question and answer sessions are routine affairs, but recent rises in Treasury yields and renewed fears of inflation have raised concerns about how the Fed may react to these events, encouraging investors to pay closer attention than usual to these particular hearings.

Pickup in Government Bond Yields Have Drawn the Market’s Attention

“While the 2-year is unchanged for 2021, the 5-year has risen nearly a quarter percentage point as of Friday’s market close while the benchmark 10-year note has seen its yield jump 41 basis points to 1.34%, an area where it hasn’t been since around the same time in 2020, before the worst of the pandemic struck. The 30-year bond yield has surged even more, leaping nearly half a point this year to 2.14%,” according to CNBC.

Powell’s Dilemma

According to CNBC, “Rising bond yields could be signaling the reflation of the economy that the Fed has been pushing and are therefore higher for good reasons. However, should the trend get out of control, the Fed then might have to tighten policy faster than the market expects, offsetting some of the good that has come with the burst in yields.”

“If this testimony was behind closed doors, I think Jay Powell would be quite pleased with what he sees in the economy and the markets,” according to Nathan Sheets, chief economist at PGIM Fixed Income. “But given that it’s public, he’s got to be careful. If he’s too sanguine about the rise in rates, the markets are going to take that as a significant green light for rates to rip higher.”

“The Fed is comfortable with an organic rise in rates reflecting shifts in views on growth and inflation,” he added. “But I think the Fed also wants to be careful that it doesn’t create and amplify a self-sustaining dynamic that pushes rates higher for other reasons.”

Those “other reasons” primarily would be fears that the economy could overheat.

For a look at all of today’s economic events, check out our economic calendar.

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.