{"id":81387,"date":"2023-11-06T17:27:02","date_gmt":"2023-11-06T22:27:02","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/the-fed-wanted-the-bond-markets-help-in-fighting-inflation-is-it-backfiring\/"},"modified":"2023-11-06T17:27:06","modified_gmt":"2023-11-06T22:27:06","slug":"the-fed-wanted-the-bond-markets-help-in-fighting-inflation-is-it-backfiring","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=81387","title":{"rendered":"The Fed wanted the bond market\u2019s help in fighting inflation. Is it backfiring?"},"content":{"rendered":"
\n
<\/p>\n

<\/p>\n

\n

\n \u201c<\/span>\u2018 With financial conditions, we\u2019re looking for persistent changes that are material \u2026 Longer-term rates that have moved up, they can\u2019t simply be a reflection of expected policy moves from us.\u2019 \u201d<\/span>\n <\/p>\n


\n \u2014 Jerome Powell at Nov. 1 press conference<\/span>
\n <\/small><\/p><\/div>\n<\/p><\/div>\n

Federal Reserve Chairman Jerome Powell said last week that a sharp, recent increase in bond yields may be helping with his fight inflation, suggesting that the Treasury market could be doing some of the central bank\u2019s work for it.<\/p>\n

The problem is that Powell\u2019s remarks appeared to then set off a power rally in stocks, while also sparking a sharp retreat in long-dated bond yields, which are used as a peg to finance the U.S. economy.<\/p>\n

\n

In other words, the bond market just demonstrated how quickly tighter financial conditions can come unraveled.<\/p>\n

\u201cIt was a bit ironic that in touting financial conditions, Chair Powell undid some portion of the tightness we\u2019ve been experiencing as of late,\u201d said Mark Heppenstall, chief investment officer of Pennsylvania-based Penn Mutual Asset Management, which oversaw roughly $31.3 billion in assets as of September. <\/p>\n

Powell\u2019s remarks, offering some reassurance that the central bank could be done with hiking interest rates, prompted the bond market to continue pulling back last week from a recent steep climb in long-term Treasury yields. Two days after his comments, the 30-year Treasury rate
\n BX:TMUBMUSD30Y
\n ended Friday with its biggest weekly decline since March 2020. Meanwhile, the 10-year yield
\n BX:TMUBMUSD10Y
\n and the policy-sensitive 2-year rate
\n BX:TMUBMUSD02Y
\n respectively had their biggest weekly drops since March and August-September.<\/p>\n

The moves illustrate the downside of relying too much on financial markets to do some of the Fed\u2019s work, particularly as a way of avoiding future rate hikes. <\/p>\n

Economists at Barclays
\n BARC,
\n -0.03%<\/bg-quote>
\n said that the policy-setting Federal Open Market Committee is stuck in a \u201ccircularity loop,\u201d with its intention of formulating policy based on tighter conditions undermining that very same tightness. They said developments since the Fed\u2019s Oct. 31-Nov. 1 meeting \u201cseemingly contradict\u201d Powell\u2019s comments that rising long-term yields matter only to the extent that they are \u201cpersistent\u201d and not \u201ca reflection of expected policy moves.\u201d<\/p>\n

Read: <\/strong>Treasury dealer still forecasts another Fed rate hike, but not until January<\/p>\n

\u201cThere\u2019s no doubt that the move higher in long-end rates is another form of tightening that\u2019s happening, particularly in the mortgage market,\u201d Heppenstall said via phone on Monday. <\/p>\n

However, Heppenstall also speculated there might have been \u201csomething going on behind the scenes\u201d that Powell has become aware of and investors are not, such as potentially more stress on banks. \u201cHis words weren\u2019t really consistent with the message from the Fed\u2019s statement, which came in hawkish.\u201d<\/p>\n

Last week\u2019s drop in yields also may have been related to \u201coffside positions coming back into the market,\u201d Heppenstall said. Indeed, data from Goldman Sachs Group
\n GS,
\n -1.13%<\/bg-quote>
\n and the Commodity Futures Trading Commission shows that heading into last week, hedge funds and other investors were likely surprised by the powerful rebound in stocks and bonds seen through Friday, forcing many funds to chase the market higher.<\/p>\n

See also:<\/strong> Hedge funds left behind as stocks, bonds scored best week of 2023, data shows<\/p>\n

On Monday, 2-, 10- and 30-year yields reversed direction from Friday\u2019s session, by posting their biggest one-day jumps in roughly two weeks or more as traders priced in a 17.1% chance of a Fed rate hike by January. Meanwhile, all three major stock indexes
\n DJIA<\/p>\n

SPX<\/p>\n

COMP
\n managed to post gains after struggling to hold on to them.<\/p>\n

At global investment manager Nuveen, which manages roughly $1.1 trillion in assets, Saira Malik, the San Francisco-based chief investment officer, said \u201cthe Fed left the door open to another possible rate hike before year-end \u2014 a stance consistent with its progressively upgraded characterization of U.S. economic growth, from \u2018moderate\u2019 to \u2018solid\u2019 to \u2018strong\u2019 in its past three policy statements.\u201d<\/p>\n

With third-quarter GDP growth of almost 5% and a 3.7% annual core PCE price index, \u201cinflation remains squarely in the Fed\u2019s crosshairs, even as markets expect the inflation rate to fall to about 2.4% over the long term,\u201d Malik said in a weekly note. <\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

\u201c\u2018 With financial conditions, we\u2019re looking for persistent changes that are material \u2026 Longer-term rates that have moved up, they can\u2019t simply be a reflection of expected policy moves from us.\u2019 \u201d \u2014 Jerome Powell at Nov. 1 press conference Federal Reserve Chairman Jerome Powell said last week that a sharp, recent increase in bond […]<\/p>\n","protected":false},"author":1,"featured_media":81388,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-81387","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nThe Fed wanted the bond market\u2019s help in fighting inflation. 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