Jerome Powell says Fed will let bond market volatility 'play out' amid historic Treasury collapse
- The Fed will let the bond market volatility "play out," Chairman Jerome Powell said.
- Rising yields have helped constrain financial conditions, he said at the Economic Club of New York.
There could be several factors sending Treasury yields higher, and the Federal Reserve will let the bond market run its course, Chairman Jerome Powell said on Thursday.
The comments come as the collapse in Treasury bonds since 2020 now ranks among the worst market crashes in history, with the 10-year yield approaching 5% for the first time since 2007.
"Markets have been volatile. You've seen the rates moving up and down a lot. I think we have to let this play out and watch it," Powell said at the Economic Club of New York. "For now, it's clearly a tightening of financial conditions, and so we'll be watching it carefully."
He also noted that while future economic data could still warrant tighter monetary policy, rising bond yields have been an important driver of recent financial restraints.
Asked what accounts for their upswing, he said what's likely not a factor is expectations of higher inflation nor changes in the fed funds rate over the next year or two.
Instead, increasing yields could be linked to rising term premium, or how much investors want to be compensated for holding the asset, as well as increased economic resilience, growing fiscal deficits, quantitative tightening, and possible changing correlations between stocks and bonds.
Ultimately, bond prices are determined by the supply and demand of Treasurys, Powell added. The supply is known as the US government issues more debt, but demand could depend on any of those factors affecting yields today, in addition to sentiment, he said.
While it's clear that higher yields are constraining financial conditions, the Fed will be watching for the persistence of this effect, Powell said.
Earlier this month, Treasury Secretary Janet Yellen tried to calm the bond market, saying there's no "evidence of market dysfunction."
"When rates are more volatile, sometimes you see some impact on market function, but that is pretty standard," she told the Financial Times.