US 3-Year Yield Rises as Fed Insists on Moving Away from Pandemic-Related Accommodation
The United States US Treasury’s 3-year auction hit a high yield of 1.237% on Tuesday, up from the 1% high in the previous auction as Fed insists on Moving Away from pandemic-related accommodation.
The bid to cover ratio for the auction was 2.47, above the 2.43 ratio in the previous auction. Dealers represented 56.46% of the bids, with direct bidders at 11.5% and indirect bidders at 32.04%.
For takedown, bidders took 22.84%, with direct bidders at 15.51% and indirects were awarded 61.65%. The combination of an improving labour market and surging inflation justifies the need to remove monetary policy accommodation in 2022, Fed Chair Jerome Powell said Tuesday in testimony to the Senate Banking Committee.
Challenged by senators from both parties on whether the Federal Open Market Committee is acting too soon or too late in removing accommodation, Powell noted the unprecedented aspects of the pandemic and repeated that the FOMC will adjust policy as needed.
While the FOMC’s dual mandate is balanced between maximum employment and price stability, inflation is currently the bigger concern, Powell said. In his prepared testimony, Powell said that the Federal Open Market Committee “will use our tools to support the economy and a strong labour market and to prevent higher inflation from becoming entrenched.”
The FOMC will remain data-dependent, Powell said, noting that there is a strong likelihood that the FOMC will adjust interest rate policy this year. However, he would not commit to the timing of rate hikes due to continuing uncertainty and would only say that a roll-off of assets on the balance sheet could occur “perhaps later in the year.”
The historical level of inflation is due to both strong demand and supply issues. The Fed can affect the former but not the latter, Powell said, adding that he expects supply issues to ease this year but inflation pressures to remain through the end of 2022.
On the employment side, Powell said that it is going to take a “long expansion” to bring labour force participation back to pre-pandemic levels and lift the supply of labour. Currently, rising wages are not contributing to inflation, he added, but could at some point.
Many analysts expect the FOMC to begin raising rates in March after its asset purchase program has been tapered to zero and recent comments from Fed officials and the minutes of the Dec. 14-15 FOMC meeting suggest that the Committee will not wait for the participation rate to rise further before acting.
The economy that the Fed faces going forward is different from the one that existed before the pandemic began, Powell noted in his prepared text and will require the Fed to be more flexible.
“We can begin to see that the post-pandemic economy is likely to be different in some respects,” Powell said. “The pursuit of our goals will need to take these differences into account. To that end, monetary policy must take a broad and forward-looking view, keeping pace with an ever-evolving economy.”
#US 3-Year Yield Rises as Fed Insists on Moving Away from Pandemic-Related Accommodation… Read Also: US 3-Year Auction High Yield Rises, Demand Prints Higher
