Updated 6:37pm ET September 17, 2020
Burden of inflation proof is on the Fed
Fed Chair Powell told the world on Wednesday that the Fed is comfortable letting inflation run moderately above 2.0% for some time and that there won't be any quick-footed response to raise the fed funds rate as it does.
In brief, the Fed currently doesn't see any need to change its policy accommodation until there is maximum employment, inflation reaches 2.0% and is on track to moderately exceed 2.0% for an extended time.
Ok, sure, Mr. Powell offered a requisite disclaimer that the Fed would change its view if risks emerged that prevent the attainment of its goals.
In theory, though, the Fed is of the view that rates will remain accommodative until the economy is "far along in the recovery process" and that there can be quite low unemployment without raising "troubling inflation."
Those views were effectively encapsulated in projections that suggested the fed funds rate will remain unchanged through 2023 when the Fed's median estimate for the unemployment rate is 4.0%.
The Fed chair asserted at his press conference that the new guidance being provided shows the FOMC's confidence in its ability to reach its 2.0% inflation goal.
That's the thinking at the Fed. The thinking in the Treasury market is that the Fed is out of its mind. Okay, maybe it's not out of its mind, but the Treasury market doesn't appear at this point to be as confident in the notion that the Fed will reach its 2.0% inflation goal.
There certainly hasn't been anything in the initial price action anyway to suggest as much.
Yields on longer-dated (and more inflation-sensitive) securities have barely budged since Wednesday's FOMC announcement. The 10-yr note yield was at 0.67% just before the announcement and now it is at 0.68% after touching 0.65%. The 30-yr bond yield was at 1.41% just before the announcement and is now at 1.43% after flirting with 1.39%.
Even more to the point, though, is that the 10-yr note yield and 30-yr bond yield are lower than they were when Fed Chair Powell introduced the policy shift to an average 2.0% inflation target on August 27. On that day, the yields for the 10-yr note and 30-yr bond settled at 0.75% and 1.50%, respectively.
Now, the stock market has run into some problems since then, which has fostered some safe-haven buying interest. Nevertheless, when the Fed chair all but concedes that the Fed wants inflation to move higher and that it won't run interference as it does, one would think longer-dated Treasuries wouldn't act as civilly as they have.
In a certain way, they are practicing civil disobedience by not bending to the Fed's desire to boost inflation. That would be the case of course if the Treasury market doesn't think the Fed can do it.
Policy positions -- and trading positions -- are subject to change, but the initial response implies that the Treasury market is still putting the burden of proof on the Fed.
--Patrick J. O'Hare, Briefing.com
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