How High Is Too High For Rising Government Bond Yields?

The two-day rise in the gold price of more than US$50 fizzled out on Tuesday. The gold price is down about 7% (in US dollar terms) since its year-to-date high set on January 6. It is also down 13% from its all-time high set in August 2020. The silver price, boosted by social media attention, did not set its year-to-date high until February 1. Since then the silver price has slid about 5% from that high. Chairman Powell testified to Congress on Tuesday stating that the Fed plans to stay its course of keeping the Fed funds rate low. It is also continuing its asset purchase. This did little to inspire a further rise in the gold or silver price. But what about rising government bond yields?

Interpreting the Fed Chairman

The increase in inflation expectations, evidenced by the increase in longer-dated US Treasury yields, caused scrutiny of Powell’s every word. Commentators searched for signs the Fed is changing its stance to one of tighter policy in order to ward off inflation taking hold. But Chair Powell stated in his prepared remarks that:

The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” 

We note one other passage in Chair Powell’s prepared remarks that is key to determining when the Fed might change its stance towards tighter policy:

“… Regarding our employment goal, we emphasize that maximum employment is a broad and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, particularly for low- and moderate-income communities. In addition, we state that our policy decisions will be informed by our “assessments of shortfalls of employment from its maximum level” rather than by “deviations from its maximum level.” This change means that we will not tighten monetary policy solely in response to a strong labor market. Regarding our price-stability goal, we state that we will seek to achieve inflation that averages 2 percent over time. This means that, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time …” (bolding added).

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