DAVY VIEW

Jerome Powell was overwhelmingly dovish yesterday (February 23rd), indicating that the Fed will be slow to tighten policy despite a more positive economic outlook and will tolerate inflation above the 2% target. He also downplayed fears President Joe Biden’s $1.9trn stimulus will fuel price pressures. The problem is that investors won’t be able to gauge whether the Fed’s commitments are credible until the US economy bounces back. So, the classic time inconsistency problem means that US Treasury yields will likely resume their upward path as CPI inflation picks up and vaccines are rolled out.