After a stunning selloff in U.S. Treasuries took benchmark 10-year yields above 1.6%, the highest in a year, the March 16-17 Federal Reserve meeting will be watched closely for hints policymakers are concerned about yields, asset bubbles and inflation.
A repricing of market interest rate expectations to anticipate a Fed hike as early as late 2022 is at odds with the Fed’s aim of keeping rates unchanged until the end of 2023. The Fed has appeared unperturbed so far by higher bond yields, but it may feel it’s time to push back against those rate-hike bets.
It is also expected to release fresh forecasts on economic growth as vaccines are distributed.
The central bank which pioneered yield curve control faces one of its toughest policy reviews on March 18-19.
The Bank of Japan will likely insert clearer guidance in its statement on what it sees as an acceptable level of fluctuation in long-term interest rates, according to sources — a sign it won’t tolerate rises that hurt the economy.
Governor Haruhiko Kuroda and his deputy Masayoshi Amamiya have sent mixed messages on loosening the 10-year yield target band. Higher yields would acknowledge a global move higher but might spur unintended worries about policy tightening.
Given a nascent economic recovery, the BOJ may even suggest scope for more negative short-term rates. In the midst of this, financial year-end flows back into yen are accelerating. A currency rally will add to the BOJ’s headaches.
Thursday brings central bank meetings in Britain and Norway.
The Bank of England is not seen unveiling additional policy easing despite concerns over the recent spike in borrowing costs.
Instead, any action such as upping the BoE’s bond-buying firepower is likely to come later in the year – perhaps in May, when the next set of economic forecasts emerge.
With first-quarter GDP data expected to show a near 4% drop on the back of pandemic-linked lockdowns and Brexit disruptions, economic recovery is expected to be gradual. A majority of economists polled by Reuters expect GDP will take two years to return to pre-COVID-19 levels.
Norges Bank is also tipped to keep rates unchanged but it may adopt a much more hawkish tone given signs of economic recovery in Norway, especially in housing.