Markets Feb 18

Treasury yields touch a post-Covid high on Fed comfort with inflation

US Treasury yields touched the highest level since the pandemic developed pace last February as it emerged that the Federal Reserve wants to lay the groundwork for public acceptance of higher inflation

Treasury yields touch a post-Covid high on Fed comfort with inflation
Federal Reserve chairman Jerome Powell thinks inflation has room to rise, which is alarming some Treasury investors. File picture: Reuters

(ATF) The 10-year US Treasury yield touched 1.33% on Wednesday – its highest point since the Covid pandemic developed pace last February, as it emerged that the Federal Reserve is debating how to make the public comfortable with higher inflation. Government bond yields eased later in the day.

Federal Reserve officials last month debated how to lay the groundwork for the public to accept coming higher inflation, and also the need to “stay vigilant” for signs of stress in buoyant asset markets, according to minutes of the central bank’s late January policy meeting.

Fed officials said they were still prepared to keep their easy monetary policy on track to help heal an ailing job market.

“Participants stressed the importance of distinguishing between… one-time changes in relative prices and changes in the underlying trend for inflation,” according to the minutes, which were released on Wednesday February 17.

“A number of participants” said they saw price increases on the horizon for goods “whose production has been subject to supply chain constraints, or soon could be; others anticipated that a possibly abrupt return to normal levels of activity could result in one-time increases in certain prices,” the minutes stated as the central bank wrestled with how to prepare for a post-pandemic reopening.

Major US food producers said they were mulling possible price hikes, and data on Wednesday showed producer prices jumped by the most in more than a decade last month.

Determined to restore jobs

Fed officials, determined to restore the job market and push inflation to 2% on a persistent basis, effectively plan to ignore that.

“Participants emphasized that it was important to abstract from temporary factors affecting inflation” and more persistent price trends that the Fed tries to target, the minutes said.

Some officials were concerned about the potential for stresses in the financial system.

“A few participants stated that it would be important to stay vigilant to ensure that the banking system remained strong and resilient,” with “some participants” noting the boom in initial public offerings of stock, and rising asset values “that might have been affected by retail investors trading through electronic platforms.”

The dramatic rise and crash of GameStop and other “meme” stocks is the topic of a congressional hearing on Thursday February 18.

'Upside risks'

The hundreds of billions of dollars of federal fiscal payments last year and almost $2 trillion under debate in Biden’s stimulus plan have been needed to keep families afloat, but also represent “upside risks” if consumers spend more freely than expected in a reopened economy, the minutes said.

But Fed officials said the premium was on keeping support for the economy in place.

“Participants observed that the economy was far from achieving the Committee’s broad-based and inclusive goal of maximum employment and that even with a brisk pace of improvement in the labour market, achieving this goal would take some time,” the minutes said.

The Fed made few changes to its policy statement at its meeting in January, and did not issue new economic forecasts.

It next meets on March 16 with a policy decision and new economic projections to be issued the next day.

The central bank has pledged to keep its key overnight interest rate near zero until inflation is “on track to moderately exceed” its 2% target and the job market is approaching “maximum employment” – a promise likely to keep rates low for years to come.

The Fed has also promised to continue purchasing $120 billion of government bonds per month until there has been “substantial further progress” towards its inflation and employment goals.

Given the economy’s halting progress in recent months, that may mean Fed policy stays largely on hold for an extended period, and officials in recent public statements have stressed they are in no rush to shift away from crisis-fighting mode.

“We’re going to be patient,” Fed chairman Jerome Powell said at a news conference after the end of last month’s policy meeting. “We’ll seek inflation moderately above 2% for some time ... The way to achieve credibility on that is to actually do it. And so that’s what we’re planning on doing.”

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US economy US Fed Federal Reserve Jerome Powell inflation Treasury yields