Market Volatility on Yellen's Comments About Rate Increases Is Misdirected

Market Volatility on Yellen's Comments About Rate Increases Is Misdirected

Rapid economic growth need not lead to significant increases in interest rates or meaningfully faster inflation. Muscular recoveries from last year's deep slump imply neither the imminent end of prolonged monetary easing nor any marked slowdown in the printing presses. Some folks are clearly having trouble digesting this break with orthodoxy. U.S. Treasury Secretary Janet Yellen's relatively anodyne comment about the prospect of higher borrowing costs from a pre-recorded interview with the Atlantic rippled through financial markets Tuesday. Yellen later clarified that she wasn't predicting or recommending that the Federal Reserve pull any stimulus. I believe her: It's unlikely that someone so well versed in Washington’s ways would talk out of turn. Fed officials zealously guard their independence, as Yellen did when she was Fed chair from 2014 to 2018. Investors zeroed in on Yellen’s line that rates may have to rise “somewhat” to ensure the economy doesn't overheat. More telling, however, was her statement that any increases could be “very modest.” Those words point to the extremely incremental nature of what might transpire in bond yields or the Fed's …
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