Stocks Tumble, Gold Dumps , Dollar Jumps Amid Treasury Yield Spike as Powell Signals Inflation is Ahead

A wave of heavy selling pressure and heightened volatility hit the financial markets on Thursday after Federal Reserve Chairman Jerome Powell failed to reassure investors that central bank policymakers would keep surging bond yields and inflation expectations under control.

At 21:00 GMT, March E-mini S&P 500 Index futures were down 1.02%, June 10-year Treasury Notes were off by 0.42% and April Comex gold futures had lost 1.13%.

The major currencies were also lower as the March U.S. Dollar Index soared 0.76%.

Powell Reiterates Fed’s Stance

Powell said the economic reopening could “create some upward pressure on prices,” reiterating that the central bank would be “patient” before changing policy even as it saw inflation pick up in what it expects would be a transitory fashion.

The Fed chief did acknowledge the rapid rise in rates recently caught his attention, but said the Fed would need to see a broader increase across the rate spectrum before considering any action, he said during the Wall Street Journal Jobs Summit Thursday.

Powell said price increases above the Fed’s 2% target for a couple quarters or more would not cause consumers’ long-term inflation expectations to materially change.

“We want inflation expectations to be anchored at 2%,” Powell said. “Inflation is running below 2% and has done so since the pandemic arrived.”

Is the Fed Losing Control of Monetary Policy?

Powell and his policymakers have until March 17 to regain control of monetary policy or they could face a creditability issue with the financial markets that could lead to a surge in volatility.

“With long rates rising in response to his commentary, we are again seeing a market that is taking control of monetary policy from the Fed,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “The Fed has put themselves in a tough situation and the only way out is if inflation does not rise further and does not get to their 2% target. If it does, they have a problem because they will be afraid to confront it with higher rates if they remain so focused on employment.”

Still others see a positive outcome.

“There’s a growing worry that the economy may be running away from the Fed. While the thought of rapid change could be enough to scare investors now, we see higher inflation as a long-term positive for the market,” said Lindsey Bell, chief investment strategist for Ally Invest.

“We’re still seeing historically low levels of inflation, so it would take a lot of change for inflation to get out of control,” Bell added.

What a Difference a Year Makes …

Last year it was bad news was good for stocks and gold. This year, we’re back to good news is bad for those assets. Earlier today, the U.S. reported that weekly jobless claims were better than the forecast, a small sign of an improving labor market. However, with that kind of news, the market moved interest rates slightly higher on expectations of better economic growth. Traders reacted by dumping stocks.