A few words is all it takes.

Photo: /Bloomberg News

During earnings season in the middle of a pandemic, there would seem to be no shortage of things for investors to fret about. Could a new variant of the virus knock markets? Or negative guidance from a major American company reset earnings expectations?

Perhaps not. An offhand comment by Treasury Secretary Janet Yellen about interest rates on Tuesday revealed what is fueling market sentiment, to the exception of almost anything else.

Speaking at an event with the Atlantic, Ms. Yellen said, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.” She was referring in particular to the Biden administration’s planned long-term spending, some of it years down the line, when the economy will probably be much closer to full employment.

To be sure, the market was already down for the day when the Treasury Secretary’s comments hit the wires, but it’s telling that such an anodyne remark—by someone who knows very well the clear demarcation between Federal Reserve and Treasury policy—could deliver such a jolt. Ms. Yellen walked back her comments later, at The Wall Street Journal’s CEO Council Summit.

How the Fed reacts to the economic recovery and the administration’s bulging spending plans isn’t all that matters, but it sometimes seems like investors believe that it is. Chairman Jerome Powell has repeatedly stressed that the Fed intends to sit on its hands and allow inflation to stray marginally above 2% without acting to cool the economy.

Investors largely trust Mr. Powell, but they’re cautious too. The possibility of a bond-market tantrum or higher inflation has supplanted pandemic-related risks as investors’ greatest concern Bank of America’s monthly fund-market surveys for the past two months.

A hint of deviation from the Fed’s existing policy—apparently from any source, in any context—will continue to be seen as the greatest risk of an upset of already very highly valued equity markets.

Write to Mike Bird at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

This post first appeared on wsj.com

Leave a Reply

Your email address will not be published. Required fields are marked *

You May Also Like

How Black pastors under 40 are trying to get their peers back into the pews

Empowerment Church in Southfield, Michigan, has a robust 1,000-member, mostly Black congregation.…

How to Plant a Miniature Succulent and Alpine Garden

If you can make space for a miniature rock garden — one…

‘Everything is gone’: Factory worker survives tornadoes but loses job, car and home

IE 11 is not supported. For an optimal experience visit our site…

New wave of Covid cases hits U.S. officials, rattles Washington

WASHINGTON — A fresh wave of Covid-19 cases swept through the nation’s…