Fed chief Jerome Powell, shown Monday at a conference in Washington, D.C., said ‘nothing’ would prevent the central bank from raising rates by a half-point at a coming meeting if needed.
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It shouldn’t come as a surprise that Federal Reserve officials are considering a half-percentage-point rate increase this year. Statements to that effect still prompted a selloff in Treasuries on Monday.
While short-dated yields rose most, the news hit Treasuries across the curve. The iShares 20+ Treasury Bond ETF (ticker: TLT) was on track for a 2.6% decline in late trading, just one day after its biggest single-day inflow on record. Bloomberg data show that the fund brought in $1.6 billion of investor cash on Friday.
Yields jumped as Fed Chairman Jerome Powell spoke at a conference hosted by the National Association of Business Economists, and highlighted the risks of maintaining loose policy with high inflation.
“We want to be very careful about moving expeditiously to get policy where it needs to be,” he said Monday, in response to a question about inflation caused by Russia’s invasion of Ukraine. That could be seen as a shift from prior testimony to Congress, where he said the uncertainty around the economic effects of Russia’s invasion of Ukraine prompted him to lean toward a 25-basis-point rate increase at its March meeting.
When asked what would prevent a 50-basis-point increase at a coming Fed meeting, Powell said “nothing.”
He then elaborated, saying that a 50-point increase is “not a decision that we’ve made. What I’ve said is that if we think it’s appropriate to raise 50 basis points at any meeting or meetings then we will do so. I don’t have a test here for what will trigger that,” he said. “The expectation going into this year was that we would see inflation peaking in the first quarter and maybe leveling out and then seeing a lot of progress in the second half. That story has already fallen apart. To the extent that it continues to fall apart, my colleagues and I may well reach the conclusion that we’ll need to move more quickly, and if so we’ll do so.”
Treasury yields rose sharply, with the 2-year and 3-year yields marking the largest increase. The 2-year yield rose 19 basis points, or hundredths of a percentage point, to 2.13%, and the 3-year yield rose 20 basis points to 2.33%. Longer-dated Treasury yields rose as well, with the 10-year yield up 15 basis points to 2.3%.
The increase in yields and the losses in the iShares 20+ Year Treasury ETF are just the latest example of the risk of holding long-dated bonds as the Fed raises rates to fight inflation. They may offer better yield after a selloff, but a more hawkish tone can still cause losses.
Write to Alexandra Scaggs at [email protected]
