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Powell: Fed will be ‘patient’ on keeping easy money policy

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Yahoo Finance's Brian Cheung joined Yahoo Finance Live to break down Fed Chair Powell's latest remarks.

Video Transcript

SEANA SMITH: Fed Chair Jay Powell speaking at the Wall Street Journal Job Summit earlier today. Investors did not like what he had to say about inflation. You can see it reflected in the market action today. We have the Dow off 489 points. We were off over 700 points not too long ago.

We want to bring in our Fed reporter Brian Cheung to help us make sense of everything not only that Fed Chair Jay Powell said today, but of course, also, the market's reaction. Brian, just starting with what we heard from Powell earlier, once again, he played down the risk of rising yields, and clearly, it's something that investors are a little bit concerned about.

BRIAN CHEUNG: Yeah, well, you mentioned that the markets are a bit sour to the remarks from the Fed chairman. That happened around noon today. But it wasn't necessarily that the Fed had a change of tone. It seemed like markets, if anything, they wanted to hear more dovishness from the head of the central bank. But here was the big quotation that caught a lot of attention. It was, quote, "I want to be clear about this. If we do see what we believe is likely a transitory increase in inflation, where longer term inflation expectations are broadly stable levels consistent with our framework and goals, I expect that we will be patient."

So the P word, patient, showing that the Fed is committed to keeping its monetary policy easy, obviously referring to near zero interest rates and that $120 billion a month pace of asset purchases. But it seemed like markets were maybe a bit more eager to see something like-- something closer to yield curve control, a commitment to the Fed actually buying longer term bond yields like the 10-year and like the third year until yields are capped below a certain level, without any sort of commentary on that front.

And it seemed like maybe it was a green light for bond markets to continue to see yields rising up, which explains the eight-basis point increase that we're seeing with the TNX, the 10-year at about 155 basis points right now. All this setting up a very interesting FOMC, which should be taking place on March 17th.

ADAM SHAPIRO: And you're going to be a busy man, but I got to ask you, for those of us who are just average kind of investors, we hear a couple of terms. Inflation, we all understand, yet this really inflation with gold selling off? And then Jared pointed out at the beginning of the hour, talking about what's going on here, is that there's kind of a tightening and a potential liquidity issue. And that scares me, having lived through, with everyone else, the 2008, 2009 crisis and the one we averted, thanks to the Fed, over the last year. Are we going back to the bad old days?

BRIAN CHEUNG: Well, we need to be clear about exactly what would be of concern, which would be if there is a liquidity crisis in the US Treasury market, that would be catastrophic. And that's because the US Treasury market is supposed to be the most liquid market in the world, the market for US government debt, which has longly perceived to be some of the most credible risk-free assets to invest in.

Now that's not necessarily the case right now. And I want to be extremely clear that Fed officials are not warning that's the case. But of course, when you look at the dynamics in the market, things do look a little fishy when you look at equities selling off, whereas bond yields are going up. Usually, that dynamic is the opposite. When the markets are selling off, that's a risk-off type of attitude. People poured into bonds, bond prices go up, and then bond yields go down. That's not happening right now.

So there is a question about whether or not there's an appetite to absorb US government debt at this time, which brings up the bank's capacity to do so. The Federal Reserve is questioning whether or not they need to further loosen the supplementary leverage ratio. It's an inside baseball thing which determines the capacity of banks to take on US treasuries. That could be something that the Fed might want to address in that March 17th meeting. But again, not necessarily a liquidity question yet. But there are some weird dynamics at play that Fed officials are wanting to watch.