Powell has remained adamant for months that current inflation is only temporary. He said the Fed would be patient in deciding when to start raising its benchmark interest rate from almost zero.
The US central bank also started a program of buying bonds worth US $ 120 billion per month in November and plans to end purchases in mid-2022.
But some investors believe the Fed needs to taper faster and raise interest rates sooner than expected to cushion a spike in consumer prices, which grew at the fastest pace in more than three decades in October.
Their views have been further strengthened through the recent public debate between several Fed officials about whether to withdraw economic support more quickly to help tame inflation.
One of the barometers of investors’ monetary policy expectations, namely financial instruments at the Federal Funds Rate (FFR) on Monday (22/11) afternoon local time, has estimated a 100% chance that the central bank will raise interest rates in July, from 92% last week.
Earlier, news of Powell’s candidacy on Monday helped push short-term bond yields – which are usually more sensitive to interest rate views – to their highest level since early 2020. Powell himself is widely seen as more hawkish than Fed Governing Council member, Lael Brainard, who also joined the group, candidacy market.
“Investors are challenging the Fed to some extent, and are becoming more concerned that the Fed is falling behind the inflation curve,” said Mike Sewell, portfolio manager at T. Rowe Price.
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Sewell – which buys short-term bonds and the US dollar – is betting that the Fed will need to raise its benchmark interest rate three times next year to tame inflation. Even the central bank’s chart, released in September, shows half of the policymakers predict a one-time hike in the benchmark interest rate next year.
On the other hand, analysts at Jefferies wrote about the rise in bond yields, which moved inversely to prices.
“This is based on the idea that the prospect of a rate hike in June 2022 has improved significantly, supporting Powell’s re-election, although the U.S. central bank believes a June rate hike is unlikely,” he said Monday.
Betting on bonds with shorter maturities also attracted Gary Cloud, portfolio manager of the Hennessy Equity and Income Fund.
“We’re in an era that investors haven’t seen before, because you have significant uncertainty about whether the Fed will act in a timely manner to prevent inflation from spiking higher,” he said.
There are differing views on how aggressively the Fed will move to help drive volatility in the bond market, reasury. The ICE Bank of America MOVE Index, which shows expected volatility in the bond market, is near its highest level since April 2020.