"Show It Through Actions, Not Words"…The Powell Effect That Ended in a Day

Market Concerns Over Inflation... Calls for Stronger Fed Measures
Political Interpretation as 'Alignment with Biden Administration Agenda'

Jerome Powell, Chair of the U.S. Federal Reserve (Fed)
[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Suhwan] The U.S. stock market, unable to withstand the surge in Treasury yields, fell sharply, mainly among large technology stocks. Analysts suggest that the effect of Federal Reserve (Fed) Chair Jerome Powell's remarks at the U.S. Senate hearing?where he dismissed inflation concerns and soothed market fears?disappeared just one day after the market rebound.

According to CNBC on the 25th (local time), the 10-year U.S. Treasury yield surged intraday to 1.61%, indicating growing market concerns about inflation. These worries immediately impacted the stock market. The S&P 500, a representative U.S. stock index, closed down 96.09 points (2.45%) at 3,829.34, while the Nasdaq, composed mainly of technology stocks, fell 478.53 points (3.52%) to close at 13,119.43.

The Market Demands Stronger Fed Measures

The sharp decline in the stock market reflects growing market concerns about inflation. Peter Chir, an analyst at Academy Securities, said, "The recent steep rise in the 10-year U.S. Treasury yield reflects growing awareness of inflation concerns," adding, "Investors expect a sharp rise in prices soon."

Although Chair Powell attempted to 'calm the market' by dismissing inflation worries, this approach has not been effective. Just one day after Powell stated at the House Financial Services Committee hearing on the 24th (local time) that "it may take more than three years to reach the inflation target," the U.S. Treasury market surged, rendering his remarks ineffective.

The fading effect of Powell's remarks is analyzed as his optimistic comments inadvertently tolerated price increases, further fueling inflation concerns.

Nathan Sheets, Chief Economist at PGIM, said, "If Chair Powell is too optimistic about the rise in (Treasury) yields, the market will interpret it as a green light for yields to rise further," evaluating that "Powell's remarks amplified market concerns."

The market expects concrete actions rather than just words from Powell. With recent sharp rises in international oil and commodity prices, the passage of large-scale stimulus measures could further drive up prices, necessitating proactive Fed actions.

Ed Al-Hussaini, Chief Analyst at investment advisory firm Columbia Threadneedle, downplayed Powell's testimony, saying, "Chair Powell's congressional testimony was all talk and nothing more." This implies that Powell's remarks lacked substantive action, so their effect could not influence the market. He added, "If the Fed does not show definite actions such as adjusting asset purchase policies, Treasury yields will continue to rise."

MarketWatch pointed out, "The Fed's dismissal of rising Treasury yields as merely a sign of economic recovery is insufficient to reassure the market."

Political Interpretation: Powell Aligning with the Biden Administration's Agenda

There is also a perception that Powell's remarks are policy statements aimed at aligning with the Biden administration's agenda. With about one year left in his term, it is interpreted that Powell is aligning with the Biden administration's policy direction to secure reappointment from President Joe Biden.

Former Fed Vice Chair Alan Blinder said, "The Biden administration's policy focus is solely on economic recovery and increasing employment," adding, "President Biden is likely pleased with Chair Powell, who prioritizes economic stimulus over stable price management."

In the market, with the Democratic Party maintaining a slim majority in the Senate by just one seat, it is expected that President Biden will reappoint Powell, who can gain bipartisan support. As a current Republican who advocates easing regulations on financial institutions, Powell is seen as a figure who can easily gain opposition party support for Biden. Powell was previously nominated as Fed Chair by former President Donald Trump in 2018 and was appointed with bipartisan support.

Ultimately, it is analyzed that the interests of President Biden, who seeks to steadily pursue his economic agenda, and Powell, who aims for reappointment before his term expires, have aligned. Mark Zandi, an analyst at credit rating agency Moody's, said, "Chair Powell is committed to President Biden's economic recovery agenda," and "the likelihood of him holding the Fed Chair position for another four years has greatly increased."

This content was produced with the assistance of AI translation services.