Stock market and crypto market synchronously decline! Powell's speech reveals: Inflation is imminent, and the job market may not fully recover by the end of the year.

During his speech on Thursday, Federal Reserve Chairman Jerome Powell mentioned that there is no complete certainty of a full employment recovery by the end of the year, and he pointed out the possibility of impending inflation, emphasizing that it is only a temporary increase. However, the rise in U.S. Treasury yields has still triggered a broad decline in the stock market and the cryptocurrency market.

Powell participated in a virtual summit hosted by the Wall Street Journal on Thursday, where he anticipated further increases in the Consumer Price Index (CPI), inflation, and employment rate. The timing of interest rate hikes will depend on the development of the aforementioned conditions, but evidently, the market was not satisfied with his response.

Warning of Impending Inflation

Powell pointed out that the economy will restart with the rollout of vaccines, which also means that the employment rate will increase, and the consumer price index will rise. He stated:

We do hope that as the economy recovers, the inflation rate will rise. We are pleased with the current situation compared to the trend expected a year ago. The current inflation rate is below the Fed's long-term target of 2%. In fact, for over a decade, the U.S. and global economy has been in a state of low inflation. The economic restart will cause the inflation rate to rise, but it will only be temporary.

Labor Market Not Fully Recovered by Year-End

Compared to February 2020 before the outbreak of the COVID-19 virus, although the unemployment rate has improved from 14% last year to the current 6.3%, Powell is not optimistic:

We have not succeeded yet. The next few months are crucial. The employment rate will increase, but it does not mean a full recovery by the year-end.

Powell had previously stated in February that the U.S. labor participation rate had plummeted, leading to a distorted unemployment rate, and the actual unemployment rate should be around 10%.

Interest Rate Hike Depends on Market Conditions

The Fed is still maintaining its low-rate policy. Regarding the conditions for an interest rate hike, Powell pointed out that the central bank will only raise rates when all conditions are met, including the labor market nearing maximum employment and long-term inflation rate maintaining at 2%. He stated:

I understand that high inflation is a very bad situation. It harms those with fixed and low incomes the most. But assuming the expected temporary inflation will occur, I hope we can remain calm in the face of danger.

Trading Market

The decline is mainly due to factors such as inflation, economic recovery, and rising employment rates mentioned by Powell, all of which align with the conditions he mentioned for an interest rate hike. This hike may happen much earlier than investors expected, leading to a strong market reaction to yesterday's remarks.

As shown, the four major U.S. indices all experienced declines ranging from 1% to 4% yesterday, almost erasing the gains made so far this year. The 10-year U.S. bond yield, represented by the green line, continues to climb.

The cryptocurrency market has also been affected simultaneously, with Bitcoin falling below the $50,000 mark, with a nearly 6% drop in the past 24 hours, while other altcoins experienced corrections ranging from 5% to over 10%.

Rising Bond Yields: Worth Noting, but Focus on Overall Finance

According to a Wall Street Journal analysis, the Federal Reserve has been buying a large amount of U.S. Treasury bonds since June last year to suppress long-term interest rates. Another reason for the rise in U.S. bond yields is the continuous increase in debt issued by the Treasury to increase the budget. According to the Congressional Budget Office, by 2051, U.S. debt will be close to twice the GDP.

Powell stated that the rise in bond yields is worth noting, and something he is paying attention to. However, the Wall Street Journal believes that he also implied that there will be no policy response at the moment.

Powell explained, "I am worried when the market is in chaos or when there is a monetary squeeze that threatens our goals." He mentioned that the Fed looks at a broad financial condition, not just a single indicator.

He further stated that if the situation changes, the Fed will use all tools to achieve its set goals.

Reportedly, the continuous rise in bond yields has already increased the borrowing costs for consumers and businesses.