Did Jerome Powell, Chairman of the Federal Reserve, get himself into a pickle? With bond yields still on the rise, it´s starting to look that way. The markets seem to be testing the Fed chief’s pain threshold, which could result in an interesting game of chicken. 

The press conference on 17 March was arguably his best to date. It contained neither doubts nor unexpected digressions to difficult topics. Powell was as clear as he could possibly be: don’t expect tighter monetary policy until maximum employment has been reached, and there is a sustained rise in inflation to 2% in sight. Well, that’s going to take a while. 

But this powerful confirmation of the forward guidance may lead to an interesting showdown with markets in the coming months. Because, with short-term interest rates close to zero in the coming years and the willingness to tolerate higher inflation for the meantime, the fate of yields at the long end of the curve are now in the hands of investors.  

Signals on green

You would expect to see higher interest rates going forward. Inflation expectations are at their highest level in ten years, and all the GDP growth estimates continue to tick up. Some analysts are already talking about 7%. And that’s not all, because the yield curve also suggests longer-term interest rates could increase further.

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