Mid-Day Market Check

To some, today’s Treasury sell-off may seem incongruous in light of Chairman Powell’s dovish remarks at today’s virtual Jackson Hole Economic Symposium hosted by the Kansas City Fed. But, the bond market’s reaction to his remarks are more about their implications than the remarks themselves. By moving to adopt Average Inflation Targeting, the central bank is announcing that while it won’t be restrictively reacting to inflation even after, and if, the 2% goal is achieved, the unavoidable implication is that it will, at least initially, leave that job to market forces. While monetary policy has an undeniable influence on all interest rates and market yields, the efficacy of that policy diminishes as one moves further out along the yield curve. The longer part of the curve is influenced more by investors’ perceptions of inflation and inflationary expectations than it is by the Fed Funds rate. As the yield on the Long Bond approaches 1.50% market participants are seeing the manifestation of those perceptions steepen the slope of the yield curve. It is important to remember though, the “dual mandate” of full employment and stable prices that was codified in the Federal Reserve Act of 1977 actually included an almost-never-mentioned third part; moderate long term interest rates. To what degree the current FOMC is focused on mandate #3 is unclear, but the notion of future yield curve control, tabled for the time being, could be dusted off if the Fed doesn’t like the direction that intervention-free market behavior is taking longer-term yields. Let’s also not forget, 1.50% on a Thirty-Year bond is still pretty moderate.