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Federal Reserve Chairman Jerome Powell added more fuel to the fire for investors already spooked by the spectre of higher inflation and rising interest rates in the bond market.
Speaking at the Wall Street Journal Jobs Summit, Powell said he expects the economic reopening to cause some inflation later this year, but that it would be temporary, and it was not enough to make the central bank hike interest rates.
That was little consolation to investors, who pushed the Nasdaq (^IXIC) and S&P 500 (^GSPC) down Thursday to correction territory (defined as a drop of 10% from its recent peak). The benchmark yield on the 10-year Treasury (^TNX) shot up to 1.54% — it’s highest level since before the pandemic. The 10-year yield is watched closely because it’s tied to longer-term borrowing costs for consumers and businesses.
“The market is having a crisis of confidence with Powell and the Fed,” John Petrides, portfolio manager at Tocqueville Asset Management, told Yahoo Finance Live.
Petrides said investors fear the “Fed's got its head stuck in the sand and that the economy is moving faster than expected, inflation is going to be a bigger issue, and the Fed may have to jam its foot on the brakes sooner rather than later in terms of QE [the bond buying program known as Quantitative Easing].”
The Fed is currently buying $120 billion a month in Treasuries and mortgage-backed securities. There’s been speculation that the central bank might return to Operation Twist, in which it sells short-term notes and buys longer dated bonds — something it hasn’t implemented in nearly a decade.
Powell didn’t offer a timeline for when the Fed would start to reduce its bond purchases saying, “We think our current policy stance is appropriate.”
But Petrides believes the longer that the Fed waits to taper its bond purchases, the harder it will be once inflation does eventually come.
Tony Rodriguez, head of fixed income strategy at Nuveen, said the Fed’s belief that inflation will be “transitory” means “they think inflation expectations will remain somewhat contained.”
Rodriguez said confidence in the Fed may hinge on whether inflation truly proves to be temporary or not. “If the Fed actually stays patient, and inflation is not transitory, it could lead to a bigger problem down the road, as we get to the end of the year and into 2022.”
He said investors may want to see the Fed acknowledge that inflation could be more than what they're currently anticipating.
Investors will be anxiously waiting to see if Jerome Powell and Company have a change of heart about inflation — and their response to it — when the Fed holds its next policy-setting meeting March 16-17.
Alexis Christoforous is an anchor at Yahoo Finance. Follow her on Twitter @AlexisTVNews.