The Fed Can't Figure Out Why Yields Are Soaring

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The big story last week — other than the stock market sucker-punching the bears — was the steepening yield curve, which, well, isn’t supposed to be happening. Quantitative easing is supposed to be doing the precise opposite.

So what’s the Fed’s take?

Yves Smith points to this Reuters piece, which implies that the answer is: They have no freakin’ clue.

The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank’s strategy to combat the country’s recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

“I’m in wait-and-see mode,” said one Fed official …”We laid out the asset purchase plan and we’re following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don’t think we should be chasing a long-term interest rate,”…

To be fair to the Fed, a lot of private-sector analysts are split, with some concluding that it’s just the result of a renewed risk appetite and the deflating of the panic premium. That would be great — though if true, it’s still going to stand as a brick wall to any nascent (though not really) comeback in housing.

But if it is a result of the bond vigilantes giving a resounding ‘no’ vote to both monetary and fiscal policy, we wonder if the leaders from the fed to the White House have the guts to do an about face, which is probably the boldest thing they could do. Our guess is no. Onward and upward!

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