Slow Fed Tapering Would Send Yields Higher, Schwab’s Jones Says

Charles Schwab’s Kathy Jones believes yields should be higher to better reflect the growth seen in the U.S. economy, and increasing calls for the Federal Reserve to taper swiftly will only keep yields low for longer.

“My feeling on tapering is the slower they go, the higher the yield,” Jones, chief fixed income strategist at Charles Schwab & Co., said Tuesday in an interview on Bloomberg TV’s “Surveillance” show. “The reason is, of course, because tapering is the first step toward tightening policy and reducing liquidity, slowing growth, aggregate demand and inflation. So if the Fed takes a very slow approach, that allows longer term expectations about inflation growth to stay higher.”

The Fed’s Jackson Hole meeting last week heightened speculation for some tapering of monthly bond purchases by the end of 2021, with no imminent risk of a rate rise. Commentary from Chairman Jerome Powell threaded the needle just enough for investors and Wall Street to accept that support for financial markets won’t be removed soon.

Jones says the Fed can still manage inflation expectations and keep markets and the economy on track.

“I think it’s premature to say that they’re going to to get behind the curve,” she said. Although, added Jones, “it’s a risk, clearly.”

Meanwhile, stocks have been helped by the government’s fiscal stimulus, which Jones said “is the big game changer in this market” as opposed to recent decades.

“We haven’t had this kind of fiscal support for the economy in a very long time and monetary policy isn’t set for that,” she said. “But I do think it is on the radar of the Fed.” 

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