Jerome Powell Knows a Market Tantrum. This Isn't Close.
(Bloomberg Opinion) -- Federal Reserve Chair Jerome Powell has worked at the central bank for almost a decade. Naturally, during that time he has seen his share of market meltdowns, from the so-called taper tantrum in 2013 to the losses in late 2018 that forced him to reverse course and start lowering interest rates. And, of course, the Covid-19 crisis that started about a year ago.
The market moves of the past week or two, by comparison, barely register as a blip.
It wasn’t so much what Powell said on Tuesday during his semiannual testimony to the Senate Banking Committee but rather what he didn’t say. Investors had hyped up the appearance as a way for the Fed chief to push back against a relatively swift move higher in longer-term Treasury yields, which in turn has led the S&P 500 Index to slide for five consecutive sessions, the longest losing streak in almost a year. High-flying stocks such as Tesla Inc. and hot exchange-traded funds from Ark Investment Management and others have tumbled.
There’s no question that an increase in long-term Treasury yields can be uncomfortable for some trades. In addition to the drop in technology and momentum shares, investment-grade corporate bonds broadly have lost 3% so far in 2021. Anyone holding 30-year Treasuries has experienced an almost 12% decline. It’s true that the jump of nearly 50 basis points in the benchmark 10-year yield in just two months will have knock-on effects for companies’ borrowing costs and mortgage rates, both of which are the highest since November.
But after a year in which corporate treasurers binged on debt like never before and a housing boom allowed Americans to collectively withdraw $182 billion in home equity in 2020, a pullback from the extremes is healthy, not harrowing. It’s also worth remembering that the current 10-year yield is still just 1.34% — before the Covid-19 pandemic, the record low was 1.32%. In real inflation-adjusted terms, the 10-year yield is -0.82%, just 10 basis points higher than the pre-2020 low.
Yes, the pace of the bond-market move arguably matters more than the level. But for all the focus on the long end of the U.S. yield curve, for the Fed, it’s all about shorter-term rates and the market’s expectations for its policy decisions. There, traders aren’t testing the central bank’s resolve in any meaningful way.
Consider five-year Treasury yields, which reflect a time horizon just beyond the Fed’s “dot plot,” which currently shows the median forecast is for no interest-rate increases through 2023. Over the past two months, this yield has moved about 25 basis points, to 0.6% from 0.35%. The majority of that move is reflected in the steepening of the yield curve from three to five years, indicating that bond traders have priced in close to one additional interest-rate increase between early 2024 and early 2026.
During the “taper tantrum,” by contrast, five-year Treasury yields jumped 100 basis points over a similar two-month stretch that started in May 2013. But the yield curve from two to three years steepened by more than 25 basis points, indicating a more imminent tightening. This time around, that spread has widened by less than 7 basis points.
Simply put, there’s no pressure on the Fed to raise interest rates before policy makers are ready to do so. And as Powell made clear during his testimony, that’s only when the U.S. economy has reached the central bank’s definition of maximum employment and inflation has hit 2% and is on track to moderately exceed that level for some time.
It’s also somewhat bizarre to have investors wringing their hands over a market selloff less than a month after Powell was grilled about what he might do to cut off speculative excess. Here are just a few examples of questions from his January press conference following the Federal Open Market Committee decision:
“But from Bitcoin to corporate bonds to the stock market in general to some of these more specific meteoric rises in stocks like GameStop, how do you address the concern that super easy monetary policy—asset purchases and zero interest rates—are potentially fueling a bubble that could cause economic fallout should it burst?”
“Your policies are working, and you can maybe do more. But the question is, can you stop doing it when it’s time?”
“Is the bubble in the corporate debt cycle more concerning for you?”
Powell repeatedly brushed off these questions, even though FOMC minutes revealed Fed staff characterized the risks to financial stability as notable. It only makes sense that he wouldn’t use his time before Congress, with many members eager to pounce on the central bank for any number of reasons, to attempt to jawbone stocks higher and Treasury yields lower. He even humored Pennsylvania Senator Pat Toomey and acknowledged “there’s certainly a link” between the Fed’s monetary policy stance and sharp rise in assets like Bitcoin and GameStop Corp. shares. Still, he and his colleagues have many opportunities to soothe market jitters if necessary before their next decision on March 17.
But it could be a mistake to count on such coddling given the current magnitude of the moves. This isn’t yet the taper tantrum, or “volmageddon,” or anything deserving of its own moniker. This is simply a modest reversal in some of the most-bubbly parts of the stock market and a return to bond yields that at least somewhat resemble normal. To use one more popular market nickname: The “Powell put” isn’t yet in the money.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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