USD: How Surging Treasury Yields Affects Powell’s Testimony

• Fed Chair Powell Delivers Semi-Annual Testimony on Economy Tuesday
• EUR Rises on Stronger German Business Confidence
• GBP Hits Fresh Highs but UK Labor Data a Risk
• NZD Soars after S&P Upgrades Sovereign Rating
• CAD Climbs to 3 Year High

Federal Reserve Chairman Jerome Powell’s semi-annual testimony on the economy and monetary policy is one of the most important events this week. The broad-based decline in the U.S. dollar is a sign that investors expect cautious comments. Approximately 1.7 million coronavirus shots are being administered every day and with 13% of the population receiving the first dose, the U.S. is charging ahead with vaccine rollout. There have been setbacks with many states including ours (New York) struggling with supply issues but a lot of that had to do with poor weather that delayed the delivery of about 6 million doses this past week. Supply will be less concerning in the coming weeks as manufacturing ramps up and the Food and Drug Administration approves Johnson and Johnson’s single-dose vaccine.

U.S. dollar banknote with map

Image Source: Unsplash

All of this is important because it reinforces the possibility of a strong U.S. economic recovery. However even if the outlook is bright, there’s very little reason for the central bank to shift course especially with the recent surge in Treasury yields. Rising rates and the steepening yield curve are two of the biggest stories that emerged in the financial markets this year. Since January 1st, ten-year rates rose from 0.91% to 1.39%. This double-digit increase is fueled by a ramp-up in inflation expectations and concerns about central bank action.

So the question now is how does this impact Powell’s testimony. It gives the central bank head more flexibility to keep monetary policy accommodative because the rise in Treasury yields tightens financial conditions by driving up mortgage and credit card rates. Powell has made it very clear during his speech to the Economic Club of New York two weeks ago that he thinks the increase in inflation is temporary and even if prices rise in the coming months, “it isn’t going to mean much.” He also advocated keeping interest rates at the current near-zero level until the economy reaches maximum employment and inflation hits 2 percent to ensure a durable recovery. Since then, data has been mixed with retail sales recovering but job growth falling short of expectations and jobless claims back at their highest level in a month.

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