The stock market got hammered Thursday on the heels of some comments Federal Reserve Chairman Jerome Powell made at a Wall Street Journal conference.
What did he say? Not really much of anything new or anything we didn't already know.
The bond market sold off Thursday when Federal Reserve Chairman Jerome Powell expressed little worry about inflation and provided no indication of policy changes ahead.
It's what he didn't say that rocked markets.
Going into this speech it may be that market expectations for the Fed to act to lower long-term bond yield rates had risen to the point that Powell's failure to embrace the possibility sparked the selloff.
Let's take a look at the yield for the 10-year Treasury, a popular "risk-free" proxy for "long-term rates" via a CNBC chart.
The 10-year Treasury yield, which has been keeping investors on edge in recent weeks, jumped to 1.54% after Powell's remarks. Last week, the benchmark 10-year soared to a high of 1.6% in a sudden move that sparked a big sell-off in stocks. Yields then generally eased back down this week before Powell triggered another spike.
Oh no! We're doomed! Long-term rates are skyrocketing! Why doesn't the Fed do something!
Oh, right.
These alleged surging long-term bond rates have only just begun to return to the level they were at before the pandemic, never mind where they were just a year before.
And that, in part, sent the market tumbling.
And here they thought their drug pusher was their friend.
In what manner had Wall Street been hoping that the Fed should act to keep long-term rates at artificially low levels, thus making it cheap and easy for businesses to borrow and keeping bonds uncompetitive with stocks as a long-term investment vehicle thus driving even conservative investors to "move up the risk curve" by purchasing increasingly speculative equities?
"Operation Twist," and yes, that is an actual thing.
One option would be to sell short-term bills and buy longer-dated notes in an effort to raise yields on the short end and lower them further out in duration to flatten the yield curve, in a process known as Operation Twist.
This should not be in any way confused with market manipulation. Market manipulation is when you do it. "Monetary policy" is what it's called when the Fed does it.
And no one goes to jail.
However, the market is not only concerned that the Fed isn't lowering long-term rates to further growth, they are concerned they are not raising them to deal with inflation.
So, in other words, Wall Street believes the Fed needs to keep long-term rates low, while also keeping long-term rates high.
If you don't understand how that works, well, you clearly lack the sophistication to interpret complex market dynamics and also magic.
This inflation concern is heightened by the Fed's sudden wokeness.
Even if inflation does rise, Powell and other Fed officials say they are content to let it run above their 2% target until the jobs market shows a full and inclusive recovery along income, gender and racial lines.
Hey, if you're going to manipulate the markets, I mean, engage in "monetary policy," you might as well include current partisan policy objectives as well.
That's how you ensure "confidence."
By the way, did I mention the Fed is still running the virtual printing presses by purchasing $80 billion dollars worth of Treasury Bonds every month?
They're also purchasing $40 billion in private mortgages to keep mortgage rates down and the housing market surging.
This is per month.
