Minneapolis Fed President Neel Kashkari expressed a sense of bewilderment regarding recent surge in 10-year Treasury yields. He noted yesterday, “The 10-year Treasury yield has gone up quite a bit. It’s a little bit perplexing what is driving them to go up as much as they have in recent months.”
He outlined a spectrum of possible explanations, from growing investor optimism about long-term economic strength to expectations of a more aggressive Fed stance on curbing inflation. Additionally, the rise in debt issued by the federal government could be another influencing factor.
“It is that combination of factors that is a little bit puzzling right now,” Kashkari commented, reflecting the multifaceted nature of the economic signals currently at play.
The relationship between inflation and long-term yields was another topic Kashkari addressed. He acknowledged the potential of elevated long-term yields to aid in reining in inflation, saying, “It’s certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down.”
However, he introduced a caveat – if these yields are reflective of changed expectations about the Fed’s actions, a conformity to these anticipations might be necessary to sustain the yields.
“But if those higher long-term yields are higher because their expectations about what we’re going to do has changed, then we might actually need to follow through on their expectations in order to maintain those yields,” he added.
Looking to the immediate future, Kashkari reiterated what he shared last month, suggesting there’s a 60% chance Fed would implement one more rate hike this year.
