How the Federal Reserve Might Try to Calm Inflation Fears This Week

When Federal Reserve Chair Jerome Powell steps up to the podium at a virtual press conference on Wednesday to discuss the U.S. central bank’s latest thinking on monetary policy, he’ll be speaking straight to Wall Street.

Yields on U.S. 10-year Treasury notes have surged to about 1.6%, close to a one-year high, in anticipation of faster economic growth as the coronavirus vaccine rollout proceeds. Not only have some $5 trillion in economic stimulus packages swelled the U.S. government’s borrowing to record levels, investors are demanding higher returns from Treasury bonds as compensation for the risk of inflation.

Wall Street analysts are worried the higher bond yields might lead to a correction in prices for riskier assets, from stocks to bitcoin (BTC, +3.25%). So the question is whether Powell will allow bond yields to keep rising or if the Fed will step in to ward off any unwanted market reaction. Options range from tightening monetary policy to address the underlying inflation risk, or deploying the central bank’s money-printing machine in new ways to keep yields from rising.