Is the market expecting too much from Powell today?
All eyes are on the Fed chair as he speaks later today at 1705 GMT
I'll try to keep this as short and succinct as possible.
There's only two ways that things are going to play out today. It is either the market feels that Powell has offered enough of a pushback against the recent rise in yields or that he hasn't done so and the bond rout looks set to extend further ahead of the weekend.
As much as there has been questions surrounding the Fed's credibility on the matter, Fed speakers this week have been far from sounding warning bells and in fact have alluded to the recent push higher in yields as "optimism reflected in the economic outlook".
Given such remarks in recent days, it would be a major surprise to see Powell go out of his way to shoot down bond sellers later today.
That said, any further selloff in Treasuries risks potential dislocations in other areas of the market which may not suit the Fed's liking.
On the one hand, there is a risk that a lack of concern may create a one-way market in Treasuries. That's not really a healthy sign for an instrument that is supposedly one of the most liquid in the world.
On the other, there is potential for spillovers to operational functions with ZeroHedge outlining how this has already started impacting repos here. And as we know from the September 2019 episode, the Fed certainly wouldn't like a repeat of funding dislocations.
However, despite those concerns, let's be clear. This is no FOMC meeting decision. This is merely a Q&A session about policy and the economy.
As such, Powell may just offer hints of what the Fed may do but not offer up any concrete action that the central bank will be taking immediately to address any issues.
Among such actions is extending the current SLR term for a few more months, and possibly yield curve control (YCC) or another instalment of Operation Twist.
I would argue that he may offer some hints about the first option but keep rather quiet on the other two as those are big decisions that may need time and tinkering.
Given such a likelihood, the market may not quite like this "lack of" pushback from Powell today but really, is it expecting too much from him given the circumstances?