While the Fed's meeting is expected to be concluded tomorrow, no action is expected at this stage against bond yields. Powell's and Yellen's recent statements show that policy makers in the US interpret inflation warming as a temporary periodic move and will not make a major move to the yield curve. On the other hand, while ultra-loose monetary policies continue, there may be an additional contribution to inflation from the demand channel with the effect of fiscal policies. This will be determined especially by the spending effect of the paychecks in the latest financial aid package.
The Fed has options, such as focusing on long-term bond purchases in the maturity structure or increasing net asset purchases. However, they will not need to take these measures at this stage. Perhaps there may be a fine technical adjustment based on the transitory period in response to the short-term bond market volatility or it can be passed with verbal guidance. If a policy step or business plan specific to the yield curve is not introduced, bond yields may continue to trend upward or remain at the levels they have been recently used to.
If inflation goes into a heating that will increase inflationary concerns rather than cyclically, the Fed may move on to the next step in policy moves. We mentioned that focusing on the long-term side in the maturity structure is an option. Fine technical tuning, if it evaluates, might look like what the ECB did last week. Unlike the Fed, the ECB paid more attention to the yield curve issue. While the overall size of the program remains unchanged, they have a goal to balance the yield curve by purchasing more bonds in the short term. We see that the asymmetry in the repo markets continues before the Fed's decisions. From the Fed's point of view, increasing the size of the asset purchase program would be the most difficult for them at this stage, as data at close frequencies also suggest a good level of economic activity. But the point is; There is a possibility that the yield curve will get ahead of the economy.
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