Powell sees ‘orderly’ market adjustment to brighter US outlook

Jay Powell, the Federal Reserve chair, has dismissed fears that the recent rise in long-term borrowing costs could be unhealthy for the US recovery, saying markets had adjusted in an “orderly” manner to a brighter economic outlook.

During testimony to the Senate banking committee on Wednesday, Powell sought to stamp out concerns, raised mainly by Republican lawmakers, that the economy could overheat as a result of Joe Biden’s $1.9tn fiscal stimulus package.

Long-term US government debt yields have lept since the start of the year, with the benchmark 10-year note trading at 1.63 per cent, far above the 0.9 per cent level seen in January. However, after hitting a 14-month high of 1.75 per cent last week, the market has stabilised in recent days.

While Fed officials have said they are monitoring the shifting market, they have hit back against warnings that the rise in yields has been so stark that it warranted alarm or intervention by the central bank.

“There’s been an underlying sense of an improved economic outlook, and that has to be part of why rates would move back up from the extraordinary low levels that we’re at — back up towards levels that we’re more likely to see, and that has been an orderly process,” Powell said in response to a question from Richard Shelby, a Republican senator from Alabama.

“I would be concerned if it were not an orderly process or if conditions would have tightened to the point where they might threaten our recovery,” he added.

A recent string of decent Treasury auctions has also helped to steady the market. On Wednesday, the Treasury department was able to offload $61bn of five-year notes at a yield of 0.85 per cent. While only slightly higher than the initial 0.847 per cent yield set prior to the auction, it marked a significant improvement from a poorly-bid sale of 7-year notes last month that set off a bout of frenetic trading.

The Treasury is looking to offload another $62bn of 7-year notes on Thursday — an auction investors will be watching closely. 

Republicans on the Senate committee seemed sceptical about the Fed’s willingness to keep monetary policy extremely loose — with its main interest rate close to zero and $120bn in monthly debt purchases — until ambitious economic recovery benchmarks were met.

“I do worry that the Fed may be behind the curve when inflation, inevitably picks up,” said Pat Toomey, the Republican senator from Pennsylvania.

Powell responded to those concerns by saying the Fed did not expect a burst in economic activity this year to “produce substantially higher prices or that the effects will be persistent”. Rather, the central bank thought higher inflation would be “transitory or temporary”.

Powell was joined at the virtual hearing by Janet Yellen, his predecessor as Fed chair who now serves as Treasury secretary.

During the hearing, Yellen said the recently approved fiscal stimulus package could potentially return the US economy to full employment by next year.

But she faced repeated criticism from Republican lawmakers for giving the IMF the green light to issue $650bn in new special drawing rights in order to boost the balance sheets of low-income countries with a hefty dose of reserve currency to help them through the pandemic.

In one heated exchange, Yellen was repeatedly interrupted by John Kennedy, the Republican senator from Louisiana, as she sought to fend off his accusations that a new SDR issuance would cost US taxpayers $180bn and funnel money to US strategic adversaries like China and Venezuela.

“I don’t know where you got a number like that from,” Yellen said, arguing that the budgetary cost to the US would be “a wash”.

She also defended the need for the SDR allocation as a policy matter.

“I would say that the current crisis has increased the need for global reserves, and that’s the IMF’s assessment. The global economy suffered a very severe, severe collapse in 2020,” Yellen said. “This allocation will help countries meet this need for reserves.”