Dow Tanks 350 Points After Powell’s Lukewarm Response to Surging Bond Yields and Inflation

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by Bhushan Akolkar · 4 min read
Dow Tanks 350 Points After Powell’s Lukewarm Response to Surging Bond Yields and Inflation
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The Federal Reserve chairman acknowledged the surge in the US Treasury bond yields but didn’t suggest any action to keep the long-term yields under check.

On Thursday, March 4, the US stock market remained under pressure with the Dow Jones Industrial Average closing 345 points down. DJIA (INDEXDJX: .DJI) ended the trading session 1.1% down closing at 30,924 levels. 

During the trading hours on Thursday, the blue-chip benchmark tanked 700 points. Not only Dow is losing points. The tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) tanked 2.1% or 274 points ending up negative on year-to-date charts. The index is now down ~10% from its 52-week high.

On the other hand, the S&P 500 (INDEXSP: .INX) sunk 1.34% losing 51 points and closing up at 3,768.47 levels. The broader market remained under pressure soon after Fed Chairman Jerome Powell said that the economic reopening could create “create some upward pressure on prices” thereby clearly stating the chances of inflation ahead.

“We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects,” Powell said during a Wall Street Journal conference. “That could create some upward pressure on prices.”

Powell added that the central bank will remain “patient” before making any policy changes as of now. It looks like Powell is open to let inflation pick up. The Fed chief, however, acknowledged that the surging bond yield has caught his attention. but before initiating any action, the Fed would wait for a broader increase across the rate spectrum.

The 10-year Treasury Yield spiked to 1.6% last week sending jitters across Wall Street. While the yield later dropped to 1.4%, it recovered back on Thursday to 1.54% soon after Powell’s remarks. Investors were expecting Powell to make some asset changes wrt the rapid rate increases. However, no word from Powell on this matter led the market to correct further.

Analysts Comments on Powell’s Decision amid Dow Losing Points

Investors on the Street have been disappointed that the Fed didn’t make any strong market changes in assets purchases. As per CNBC, the Fed has bought $120 billion in Treasurys and mortgage-backed securities. Speculations are ripe that the Fed could be implementing a new version of the operation twist wherein it sells short-term notes and buys longer-dated bonds.

But despite expectations from economists and investors, Fed officials said the central bank is in no mood to initiate any action on long-term yields. The Fed wants inflation to stay around 2% citing healthy economic conditions at this rate. Also, the Fed looks keen on keeping interest rates low at 0%-0.25%.

Powell added that the interest rates will rise only after a full employment situation and the inflation moving at sustainable levels above 2%. “There’s just a lot of ground to cover before we get to that”. Even if the economy sees “transitory increases in inflation … I expect that we will be patient”. Commenting on Thursday’s market movement, Adam Crisafulli, founder of Vital Knowledge, said:

“This was a minor negative as he failed to provide the type of reassuring comments investors were hoping for. He was vague about what actions specifically would be taken if the Fed felt yields were rising to excessive levels (he was given a few opportunities to endorse a change in QE duration but never did).”

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said:

“With long rates rising in response to his commentary, we are again seeing a market that is taking control of monetary policy from the Fed. The Fed has put themselves in a tough situation and the only way out is if inflation does not rise further and does not get to their 2% target. If it does, they have a problem because they will be afraid to confront it with higher rates if they remain so focused on employment.”

Other news from the stock market can be found here.

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