Powell'sinterview,messagingandBoyzone

We had noted yesterday that the most important event for the day is going to be Fed Chief’s interview during the Wall Street Journal Jobs summit. Markets and especially the global bond markets were expecting some comments by the Fed Chief on the movement in bonds last week and the steps which Fed is willing to address the higher yields. The spike in yields post his interview clearly indicate that the markets didn’t get what they wanted. The 10-year US treasury yield is now trading at 1.58% up close to 10 bps from yesterday’s levels. Given that the FOMC meeting is scheduled on March 15-17^th maybe it was too much to expect Powell to announce some dramatic measure and steal the thunder from the committee. But markets have reacted anyway with the risk on mood getting soured, the Dollar Index going up and equity markets across the world getting a beating. The Euro is trading below 1.20, the Pound below 1.39 and the Yen above 108.

The 32-minute interview of the Fed Chief (a highly recommended watch) can be considered a case study on the art of conveying things but keeping the message sufficiently ambivalent so that the audience is kept on its toes (possibly forever).  He was asked that what he thinks of the recent rout in the bond markets to which he answered that it was something which got his attention but Fed has already conveyed their objectives in public and he doesn’t need to add any further to it. The policies will be dependent on the outcomes of the actions which the Fed is taking, and he will not like to add any time element to it.

The Fed objectives of maximum employment and price stability (around 2% average CPI) are in the public domain and that is what they are working for. When he says maximum employment, it is a very broad-based assessment of the labour market conditions which include an improvement in LFPR and not just the headline number of the unemployment number. Fed will also judge how the wage increases are happening. On the inflation too he added the discretionary element saying that even if there is a rise in coming months, Fed will keep an eye on whether it is a transitory one because of pent up demand or it is more structural in nature. Though the overall tone was sufficiently dovish during the end of the interview, Powell added an anecdote which made the bond markets queasy. Reminiscing about his college days, he told how high the inflation was at that time and why central banks have a duty to fight high inflation.

In 1996, British band Boyzone released a song with lyrics “words are all I have to take your heart away”. In central bank parlance this is what we call the strategy of verbal intervention. Greenspan learned it from Boyzone and used it to perfection, but bond markets now may not be happy with just dovish words and will be actively looking for some action in the upcoming FOMC. NFP data tonight along with unemployment numbers will be keenly watched. Any better than the expected number can roil the bonds further.