Treasury prices are modestly higher in the belly of the curve following yesterday’s post-Powell steepening that widened the 2-year/10-year spread by 6 bps. As expected, Fed Chair Powell unveiled a new monetary policy framework involving average inflation targeting. It’s a dovish approach that would allow inflation to run hot (above target) in the short-run in order to support the economy. “Following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time,” said Powell.

This major shift in the Fed’s framework is not just about the current environment. This has been in the works for a couple of years, and it is more driven by the longer-term trend in GDP growth and productivity for the U.S. and the rest of the major developed economies, due in part to demographic factors.  From the market’s perspective, the Fed making it even more clear that policy will remain very accommodative even as inflation approaches the 2% target is largely why risk assets rallied and the curve steepened yesterday. Of course, as it relates to curve steepening, the Fed may float the idea of yield curve control again if long-end yields were to continue to rise.

Jason Haley
Chief Investment Officer