By Michael S. Derby
Federal Reserve officials said Thursday they continue to see the U.S. economy in recovery mode, with several noting they aren't concerned about the recent rise in long-term bond yields and see no need to use monetary policy to push against it.
"Despite the near-term challenges, the longer-term outlook for the economy has improved, and our actions of the past year position monetary policy well to support a strong, full recovery and achievement of our goals of maximum employment and price stability," Federal Reserve Bank of New York leader John Williams said during a video appearance.
Mr. Williams also said government spending has been a big help for the economy and the Fed is "fully committed to supporting the economy through this period and reaching our maximum employment and price stability goals." He didn't offer specifics about central bank policy going forward.
Growth this year could be the "strongest we've seen in decades," as vaccines to combat the coronavirus pandemic roll out, Mr. Williams added.
Mr. Williams spoke amid heavy market volatility, as stock prices fell sharply and Treasury yields rose. The rising cost of longer-term borrowing has rattled many investors, but over recent days Fed officials have shrugged off higher Treasury yields and attributed the bond market's shift toward higher borrowing costs to expectations for an improving economy.
Long-term bond yields "have definitely moved at the higher end, the longer end, but right now I'm not worried about that," Federal Reserve Bank of Atlanta President Raphael Bostic told reporters Thursday. When it comes to Fed actions that could counter higher yields, "I'm not expecting that we'll need to respond in terms of our policy," Mr. Bostic added.
Mssrs. Williams and Bostic are voting members of the rate-setting Federal Open Market Committee. They weighed in as the jump in Treasury yields triggered anxiety about the prospect of rising inflation among some market participants. At the same time, others wonder whether the Fed may need to ease monetary policy because of the theoretical risk rising yields could hinder growth by boosting real-world borrowing costs.
Thursday was an ugly day for stocks and bonds. The Dow Jones Industrial Average, as of 4 p.m. ET, dropped 561 points, or 1.8%, after closing Wednesday at an all-time high. The S&P 500 shed about 2.5%, and the Nasdaq Composite lost 3.5%.
Meanwhile, government bond prices fell, with the yield on the benchmark 10-year Treasury note rising to a one-year high of 1.513% from 1.388% Wednesday.
While many in the markets share the Fed's view that the bond market is pricing securities for a recovering economy, some are uncomfortable with how the Fed views the market landscape.
"To continue with the Bostic-style 'I am not worried' about the move party line risks appearing out of touch or complacent -- especially in the event equities retrace even further ahead of the weekend," BMO Capital Markets bond strategist Ian Lyngen wrote in a note to clients.
If the bond market route persists, Fed officials may change their commentary. But some economists view the current market woes as temporary. "We doubt that 10-year nominal government bond yields will continue to rise much, if at all, this year," Capital Economics said in a research note.
The main way the Fed would counter a rise in yields would be to increase its $120 billion a month in Treasury and mortgage bond buying, or the central bank could change the mix of securities it buys. Either approach would seek to cap a rise in yields and in theory limit the danger it chokes off a nascent recovery.
Fed officials, however, say current yield levels are only returning to where they were before the pandemic struck a year ago, and that borrowing costs on balance remain quite low. They also see rising yields as a natural development given the economy's improving prospects.
"I think that the rise in yield is probably a good sign so far, because it does reflect a better outlook for U.S. economic growth and inflation expectations" that are converging on the Fed's 2% target, Federal Reserve Bank of St. Louis President James Bullard told reporters Thursday. "That naturally, to me, suggests that yields should be somewhat higher than they would have otherwise been."
Federal Reserve Bank of Kansas City President Esther George said she also wasn't worried about a rise in long-term yields, noting she sees the increase as a sign investors are confident the economy is set to recover strongly.
Fed officials who spoke Thursday gave no sign they want to change the central bank's monetary policy, which combines bond buying with a near zero short-term target rate they have signaled they expect to keep in place for several years.
Fed officials also said vaccinations are the key to ensuring a healthy recovery that should help lower the unemployment rate. Mr. Bullard, who doesn't have a vote on the FOMC this year, said the current 6.3% jobless rate could fall to 4.5% this year.
Ms. George said the economy is poised for a "strong recovery once widespread vaccination is achieved." The nonvoting member of the FOMC warned against the Fed providing more aid to the economy, saying it would be unlikely to help the economy very much.
Ms. George said more government spending could speed the economy's recovery, but didn't call for more aid. She also suggested the extraordinary interventions by policy makers during the pandemic could have unintended consequences, noting many people may save money from stimulus programs instead of spending it.
Write to Michael S. Derby at michael.derby@wsj.com
(END) Dow Jones Newswires
02-25-21 1732ET
