Don’t Expect to Earn Yield on Powell’s Watch
(Bloomberg Opinion) -- Federal Reserve meetings are steadily becoming Rorschach tests: Chair Jerome Powell says broad words and analysts decide how to interpret them.
Some Fed observers said Wednesday’s meeting was boring; others called it confusing; and still others viewed it as a straightforward baby step toward tapering the central bank’s $120 billion of monthly bond purchases. There was some definitive information, however: Fed members had their first, formal, in-depth discussion about the pace and composition of paring back the regular asset purchases. And they want to see some blowout jobs numbers before deciding that they’ve met their goal of “substantial further progress” in the labor market, whatever that ambiguous phrase may mean.
The takeaway? Powell is still dovish, and he has enough consensus on the Fed to maintain the course regardless of growing concerns about supply-chain hiccups and labor shortages, as big corporations keep laying out on second-quarter earnings calls. U.S. central bankers are still comfortable with pumping new money into the economy each month to anesthetize any worries that could gum up the gears of capital markets, even with the nation poised to grow at the fastest pace in decades. (The Fed’s balance sheet, just as a point of reference, has doubled to $8.24 trillion from $4.1 trillion at the start of 2020, before the coronavirus pandemic sent the global economy into tailspin.)
So even as Powell hinted at a path to tapering bond purchases, he largely did his job in terms of not upsetting the golden apple cart of stock and bond prices. In fact, if you take a cue from one market, traders seem to think free money will keep flowing for even longer than they did before the meeting.
Longer-term nominal yields on 10-year Treasuries actually fell in the wake of the Fed’s release even as a gauge of 10-year inflation rates rose to the highest in more than a month. This led to falling real yields, which touched all-time lows of negative 1.18% on 10-year Treasuries and negative 1.98% for five-year notes.
Basically, investors shouldn’t expect to earn much, if anything, on their bonds. Powell is fine with this because he thinks the pace of inflation will moderate, and even if it doesn’t, the Fed has tools to manage it. Bullish stock and credit traders certainly like this dynamic because it makes more speculative assets look more attractive on a risk-adjusted basis. So good luck to savers out there; it looks as if it may be a relatively yield-less world out there for the foreseeable future.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Lisa Abramowicz is a co-host of "Bloomberg Surveillance" on Bloomberg TV.
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