A tumultuous day in financial markets left onlookers questioning whether the Federal Reserve had showed too little concern as longer-term interest rates crept higher — and spurred speculation that the central bank’s leadership may need to speak out against the rise.
Yields on all but very short-term government debt moved sharply higher on Thursday, driven in part by expectations that economic growth will snap back after the pandemic. Fed officials had been sanguine as rates moved up in recent weeks, pointing to the increase as a sign of growing economic confidence and downplaying the risk of a sudden increase in borrowing costs.
Still, the sudden jump Thursday rippled through financial markets, and analysts at Evercore ISI said the Fed’s message might change as a result. The jump in yields could make borrowing by the government, consumers and businesses more expensive, slowing progress toward the Fed’s economic goals.
“The Fed leadership holds some responsibility for this, as the absence of any indication of concern or — more appropriately in our view — central bankerly carefulness” in recent days “has been read in markets as a green light to ramp real yields higher,” Krishna Guha and Ernie Tedeschi wrote in a reaction note, capturing a narrative fast developing among financial analysts.
On Thursday, yields on the 10-year Treasury note surged as high as 1.6 percent. That rate was below 1 percent for much of 2020 and had been steadily increasing this year in part as investors expect that a flood of new government spending and the rollout of the coronavirus vaccine would lead to fast economic growth later this year.
Despite several public appearances in recent days, central bank officials including the Fed chair, Jerome H. Powell, and John C. Williams, the New York Fed chief, have not voiced concerns over the shift in yields. Raphael Bostic, the Atlanta Fed president, said as recently as Thursday afternoon that he did not yet see the increases as cause for concern.
“The Fed has thus far not been willing to soothe markets” and that has helped fuel the move in yields, analysts at TD Securities wrote on Thursday.
Some economists are speculating that the Fed might shift the size or style of its bond buying so that it is better-targeted at holding down longer-term interest rates.
“A change of tone at least seems warranted in our view and possibly more,” Mr. Guha and Mr. Tedeschi wrote. “This could well come in the next 24 hours.”
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