The Fed chairman expressed no concern that Treasury yields are at their highest levels since the start of the pandemic. Investors, in turn, are concerned about this position of the Fed due to inflation risks and rate hikes.
On Thursday, major US stock indexes continued to fall as investors reacted to the words of Fed Chairman Jerome Powell.
On Thursday, the S&P 500, Nasdaq Composite and Dow Jones fell 1.34%, 2.11% and 1.11% respectively, increasing the decline of the last week.
Powell said that the Fed is aiming to restore the labor market, focusing primarily on achieving maximum employment.
“We want labor markets to match our estimate of maximum employment,” Powell said Thursday.
The weekly report by the US Department of Labor on initial jobless claims filings showed that the labor market continues to recover at a slow pace.
The number of weekly applications rose to 745 thousand, exceeding the figure of the previous week, but turned out to be better than the estimates of economists at 750 thousand.
At the same time, according to Powell, the Fed will strive “to move to ensure that inflation stably exceeds 2%” until the labor market shows a complete and comprehensive recovery.
However, inflation has a negative impact on the government bond market, since it causes their yields to rise and prices to fall (prices and yields move in opposite directions). Bond prices are declining because, with inflation, the future interest payments received for owning the bond will be lower.
Asked if bond yields are at their highest since the start of the pandemic, Powell replied:
“In terms of the bond market, I am concerned about the chaotic conditions in the markets or the constant tightening of financial conditions in general, which threatens the achievement of our goals.”
Investors fear that if the Fed loses control of inflation, the US economy will “overheat” and the central bank may have to raise rates.
Stock market investors dislike raising interest rates as it makes borrowing more expensive for companies and jeopardizes debt-ridden companies that have become dependent on low interest rates.
The US Senate has decided to begin debate on Joe Biden’s $ 1.9 trillion bill. aid to Americans and the economy after all 628 pages have been read aloud. The adoption of this bill should accelerate the recovery of the economy and the labor market, but on the other hand, there are growing fears that such a huge injection of funds into the economy will cause a surge in inflation.