The Federal Reserve’s policies were perfect during the worst of the coronavirus crisis. But it seems to have ended. Now, as long-term Treasury yields soar and financial markets raise expectations for rate hikes, Wall Street wants to take action. It didn’t get it today.
Federal Reserve Chairman Jerome Powell said on Thursday that bond yields skyrocketed last week. But the policy remained largely relaxed and did not imply a “twist” in the Nasdaq policy, leading a new sale on Thursday afternoon while the Treasury yield rose.
The Fed’s policy change could come in a meeting March 16-17, however, investors look for clues as to what policymakers will do, while Fed Head Powell joins the panel at the Wall Street Journal Jobs Summit. Which starts at 12.00 ET
Powell said, “Unregulated conditions in the financial markets” or the tightening of broad financial conditions will spur policy shifts. But he stopped short of saying the latest market rotation was in line with those tests.
The stakes are high: If the Fed succeeds in suppressing the bond market protests, the stock market rally may return.
In Thursday’s volatile stock market movement, the S&P 500 returned to positive territory ahead of Powell’s speech. But fell sharply after he spoke, falling below the 50-day line.The Nasdaq broke through Wednesday’s 50-day average, with 2.7 percent drop, then a 2.2 percent drop from Powell’s comments to the Dow, which hasn’t been much lower. The researchers on Wednesday or Thursday mornings plunged more than 1%, testing the 50-day line.
The 10-year bond yield rose 7 basis points to 1.54%.
Federal Reserve Bank ‘It’s in the right place’ anymore.
Several months ago, Fed chief Powell said the central bank’s policy was “in the right place” last week gave the first clear signal that it will no longer be. A seven-year $ 62 billion auction of government bonds on Thursday attracted the weakest demand in more than a decade. The 10-year Treasury yield, which stuck below 1% before Democrats seized the Senate with two Georgia runoff electoral victories on Jan. 5, rose to 1.61 percent, the highest. Since February 2020
Back in December, Fed forecasts indicated there would be no rate hike before 2024, but “the market is pricing on a Fed rate hike in the middle of next summer,” Wells economist Sarah House. Fargo said on Tuesday the inflation outlook.
Regardless of whether the Fed’s policy is correct or not, unreliable financial markets can tighten policies, creating a risk to stock prices and slowing its recovery. Another rising Treasury yield could fuel enthusiasm about the massive infrastructure and Democrats’ tax package expected to meet the $ 1.9 trillion stimulus package.
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Operating Twist Redux?
Wall Street is increasingly expecting the Fed to adopt a policy called Operation Twist, which was last applied in 2011 and 2012.Back then, the Fed sold $ 667 billion of short-term Treasury returns and put them away. Buy long-term debt
The Fed now holds more than $ 1 trillion in treasury bills, with no more than a year old.Another $ 1.8 trillion in treasury has returns from one to five years.
A replay of Operation Twist could help hold back long-term returns, which are key in mortgage and auto loan rates. Doing so could benefit the federal deficit, as the Fed’s holdings would result in higher interest payments that the central bank returns to the Treasury.
Bank of America interest rate strategist Mark Cabana wrote this week.
Operation Twist Impact on S&P 500, Nasdaq, Treasuries
If the Fed uses Operation Twist, “the slump in stock prices will continue, led by Nasdaq,” Yardeni Research chief investment strategist Ed Yardeni wrote in a note on Tuesday.
Nicholas Colas, co-founder of DataTrek Research, found that Operation Twist experience and aftermath “showed the Fed could hold off on long-term interest rates by 100 points (base score) or more.”
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Plan B for the Federal Reserve: punt on SLR
If the Fed isn’t ready to adjust, there are alternatives on the table that might help settle financial markets. In late March, the Fed is slated to end the easing for banks from a regulation known as the Supplementary Loan Ratio, or SLR.
Last year, in response to Covid, the Fed began waiving holdings of U.S. treasury and reserves at banks at the Fed based on calculating the amount of funds that financial institutions have to hold buffer.
Banks can respond to the rule’s reinstatement in a number of ways. But one way is to lighten the holdings of the Treasury. This could put pressure on higher yields even as the new stimulus spur new Treasury supply.
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