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Stocks near session lows after Fed holds rates steady

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Yahoo Finance’s Alexis Christoforous and Adam Shapiro along with Steven Skancke, Keel Point Chief Economic Advisor, discuss the state of the economic recovery as the Federal Reserve holds rates at near-zero.

Video Transcript

ALEXIS CHRISTOFOROUS: What would you like to hear from Jay Powell during the press conference today? And might anything he say move this market?

STEVEN SKANCKE: Well, thanks, Alexis, and always great to be with you. I would like him just to stay on script and not get into any of the hypotheticals, which are going to be coming at him. Obviously, the uptick in interest rates, the Biden fiscal stimulus plan, his conversations with Secretary Yellen all are going to be part of this.

The market is really trying to figure out what it means that they're going to let inflation tick up above 2% to moderately or modestly for a period of time. And, you know, as some of the earlier panelists have pointed out, that's just going to happen in March and April. So his goal is really not to be misunderstood, not to say anything that can be misinterpreted, and let things ride until we see what happens in March and April.

ADAM SHAPIRO: So do you think-- and when we look at markets and the bit of a sell-off after we got this news today, are they reacting to that change in language in the addition of economic activity employment has moderated in recent weeks? Or are they looking further out? Markets tend to be more short-sighted, don't they?

STEVEN SKANCKE: They [AUDIO OUT] and that would certainly be a good explanation for the moderate to downward movement in markets after the Fed press release. Clearly, people are anxious about what's happening with the new strain of virus, the infection rate continuing to be strong. And also, when they look at Europe, the problems there are even more severe, I think, than people had been anticipating. You know, France, for example, very low vaccination rate, and that doesn't bode well for the outlook for our major trading partners.

ALEXIS CHRISTOFOROUS: Would love to get your take on what we're seeing play out in the bond market because we've seen the yield on the 10-year Treasury move up from about half a percent last summer. It's now above 1%. How much further room is there to grow, do you think? Are we just going to be range bound? And if so, Steven, what will that range be?

STEVEN SKANCKE: Well, I think the Fed is breathing a sigh of relief that it did come back a little bit from being up at 1.15% on the 10-year Treasury yield. Because as you know, there's been speculation. In fact, some have called for them rolling out the tool of the yield curve, targeting yield curve management.

And they have a little respite on that because you're absolutely right, Alexis. To go from about a 1/2% to 1.15% over a matter of three, four months is surprising. And it really calls to question, is the Fed going to keep interest rates, all interest rates, lower for longer? And how does something like that happen with the $120 billion a month in bonds that they're buying, including $40 billion in mortgage bonds?

So it puts them in a little bit of a tough position. They certainly will watch it because that'll be part of what triggers the market having angst when we see the March and April uptick in inflation numbers.

ADAM SHAPIRO: But we've seen the Fed say that they're willing to overshoot that inflation target. So shouldn't investors expect that and not be freaked by it when it happens, if it happens?

STEVEN SKANCKE: Well, Adam, you're a great student of the market and consumers. And the truth is, the Fed can say that, as often as they do, and yet, when there is a print on a 3% or 3 and 1/2% bump up in the CPI, folks are going to-- could lose-- quite likely could lose their senses about them and wonder what is the Fed going to do next. And are they going to say something? Are they going to dispel the notion that something-- that that's not OK?

They'll have a very tough March and April FOMC announcement and press release if it does that. Because it will be surprising, given where inflation has been so long. And the fact that it really is almost a mathematical phenomenon because of what happened last March and April, still, it's going to take a lot of people by surprise.