On Wednesday, Jerome Powell reiterated he is untroubled by the bond market’s spasms. Two more of his Federal Reserve colleagues predicted higher interest rates before 2024.
Either might have been enough to launch markets into a fit just weeks ago. This time, stocks surged and yields slumped -- and the central bank’s larger message of enduring dovishness carried the day.
While seven of 18 officials projected higher rates in 2023, up from five of 17 in December, Powell’s assurance that the view is still in the minority fueled a rebound in the Nasdaq 100, which had been battered by a selloff in Treasuries. Yields on 10- and 30-year bonds eased from their highest in over a year, soothed by Powell saying it’s not yet time even to begin discussing reducing the central bank’s asset purchases, which currently clock in at $120 billion per month.
“With low rates through 2023, investors are salivating over at least two more years of pure caffeine for equity markets,” said Mike Bailey, director of research at FBB Capital Partners.
While the rise in Fed officials predicting a rate hike as early as 2023 was small, it caught the attention of markets, at least at first. Should the view catch on, “a reduction in asset purchases in 2022 might be assured,” wrote Ira Jersey, chief U.S. rates strategist for Bloomberg Intelligence.
That helps explain why Treasury yields initially climbed after the decision was announced, in the eyes of WallachBeth Capital’s Ilya Feygin, though “this reasoning seems wrong and should be ignored,” he said. “Once the dust settles, we would expect 10 year notes at 1.60% or below.”
The rolled-forward rate expectations were also paired with boosted forecasts for economic growth and the labor market. The median estimate for unemployment fell to 4.5% at the end of 2021 and 3.5% in 2023, while gross domestic product was seen expanding 6.5% this year, up from a prior projection of 4.2%.
“The market had been assuming that upgraded growth and lowered unemployment forecasts would have to drive some discussion of tighter policy, but he sternly put the kibosh on any discussion of eventual tightening,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors LLC. “Essentially, the message was, ‘let’s see how hot things can really get.’ I think the market liked that.”
Risk assets also proved resilient to Powell’s latest brush-off of the lurch higher in Treasury yields. Just two weeks ago, equities buckled when Powell was deemed to express insufficient urgency about rising rates when he spoke in a Wall Street Journal interview. While saying he’d “be concerned by disorderly conditions in markets or persistent tightening in financial conditions,” he stopped short of doing or saying anything to rein them in.
Fast forward to today and the language was basically identical, with the Fed chair adding: “The stance of monetary policy we have today we believe is appropriate. We think our asset purchases in their current form -- which is to say across the curve, $80 billion in Treasuries, $40 billion in mortgage-backed securities, on net -- we think that’s the right place for our asset purchases.”
This time, equities evinced nary a peep of frustration.
“It’s consistent with their view that they are fine with inflation running hotter than 2% for a period of time -- they’re now concerned about the average inflation,” said Elliott Savage, portfolio manager at YCG Investments. “While bond yields have risen they’re still at low historical levels.”
— With assistance by Elena Popina
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