Fed sees rising bond yields, inflation expectations as a possible win

Jonnelle Marte, Ann Saphir and Howard Schneider, Reuters

Posted at Jan 08 2021 11:35 AM

Fed sees rising bond yields, inflation expectations as a possible win 1
Federal Reserve Board building on Constitution Avenue is pictured in Washington, US, March 19, 2019. Leah Millis, Reuters/file

A recent rise in U.S. bond yields and market inflation expectations have bolstered Federal Reserve officials' hopes the central bank's new monetary policy approach is taking hold and could be further buoyed if a Democratic-led Congress rolls out more spending.

"I am encouraged to see the rise in market indicators of inflation expectations. ... That is what we are trying to support," Richmond Federal President Thomas Barkin said on Thursday in an interview with Reuters.

Barkin said he regarded a recent rise in interest rates on Treasury bonds as also part of a "reflation trade," a sign that investors were factoring future hikes in prices into their decisions by demanding higher interest rates, rather than representing a worrisome tightening of financial conditions.

"The ingredients for higher inflation are in place," St. Louis Fed President James Bullard said in separate comments to reporters. "You have very powerful fiscal policy in place and perhaps more to come," with Democrats now about to control the White House as well as the U.S. Senate and House of Representatives.

"You have a Fed that ... wants to temporarily have inflation above target. You have the economy poised to boom at the end of the pandemic," once the impact of new coronavirus vaccines is felt, Bullard said.

The yield on the benchmark 10-year Treasury rose above 1.07 percent on Thursday, hitting its highest level since March. The 5-year forward inflation expectation rate hit nearly a two-year high of 2.05 percent. 

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