• Powell was not concerned by higher yields early last week but he may change his tune on 4 March
• Brainard has already admitted that more recent price action has caught her attention
• We expect Powell to flag scope for a policy response if rising long-term yields threaten recovery

The key event for the market this week would usually be the US non-farm payroll report but focus is instead centred on Fed Chair Powell’s speech on 4 March. We doubt that he will signal near-term Fed policy action in response to the recent UST yield volatility. Given current yield levels and financial conditions, it is difficult to justify such a move without appearing to be driven solely by market developments. However, we see scope for Powell to flag potential for a Fed policy response if it starts to consider rising long-term yields a threat to the recovery. He is unlikely to mention options such as extending the duration of UST purchases or an Operation Twist, but we suspect this is the route the Fed would take, if action were needed.

In his 23-24 February congressional testimony, Powell gave no sign that he was worried about the rise in long-term UST yields. This was consistent with comments from other FOMC members. We suspect, however, that the price action on 25 February, when 10Y spiked to 1.60%, did cause concern. Fed Governor Brainard remarked on 2 March that “some of those moves last week and the speed of the moves caught my eye”. Moreover, she stated that she would be concerned if she saw “disorderly conditions or persistent tightening in financial conditions that could slow progress” toward the Fed’s full employment and 2% average inflation goals.

In terms of UST yields, we think Powell’s speech should support the calmer price action seen so far this week, as the market will likely conclude that 1.50-1.60% for the 10Y is, near-term at least, the top of the Fed’s comfort zone. Simply repeating the Fed’s current forward guidance and its view that near-term inflation will be transitory, however, runs the risk of allowing renewed yield upside

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