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Fed Says It Will Stick To Its Plan, As Bond Yield Rises

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Federal Reserve chairman Jerome Powell says he won’t get fooled again. While the Fed in the past has acted preemptively in anticipation of higher inflation, Mr. Powell says he won’t make that same mistake again.

Speaking to The Wall Street Journal, Mr. Powell reiterated the economy is still “a long way from our goals of maximum employment and inflation averaging 2% over time.”

In the past year, the interest yielded on a 10-year Treasury bond shot 1% higher to the current yield of 1.6%. Much of the 1% increase came in recent weeks.

A rising bond yield is not necessarily bad for stocks but could be. If bond yields become more attractive relative to stocks, it raises fears that bonds will draw money away from the stock market and lead to lower stock prices, or even a collapse in stock prices. Just yesterday, the S&P 500 plunged 1.3% after the 10-year bond yield hit 1.6%.

Are heightened fears of rising bond yields justified? Not when you consider that the current yield of 1.6% is lower than the 1,76% pre-pandemic level of January 2020, and that the job market has plenty of room to grow.

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Even after surprisingly good job growth announced this morning -- 379,000 jobs were gained in February, far better than the 200,000 expected and the 166,000 in January – the number of jobs in the U.S. is still way off compared to the pre-pandemic boom of late 2019.

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The 143 million jobs in the U.S. today is 9.5 million lower than the pre-pandemic 153 million peak in February 2020.

The Fed chief, Mr. Powell, has said the central bank would not change its accommodating stance until all the job growth achieved at the peak of the last expansion were restored. He won’t get fooled again by rising bond yields, stock market volatility or other temporary financial pressures that are likely to arise.

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The Standard & Poor’s 500 stock index closed Friday at 3,841.94, a gain of 1.95% from Thursday’s close. At 3,841.94, the S&P 500 closed 0.80% higher than last Friday. The index is up an amazing 52.78% than its March 23rd bear market low. The S&P 500 is less than 3% from its all-time. The pandemic is not over yet in the U.S. A $1.9 trillion aid package is almost certain to send the U.S. savings rate and disposable personal income skyrocketing. And the first of two hikes expected in 2021 is about to hit. It’s wise to expect more than the usual stock market nervousness to continue.

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