Fed Vice Chair Philip Jefferson shared in a speech overnight the insights onchallenges posed by rising real long-term Treasury yields. He pointed out the complexities faced by policymakers when determining the direction of monetary policy amidst such changes.
Jefferson stated, “In part, the upward movement in real yields may reflect investors’ assessment that the underlying momentum of the economy is stronger than previously recognized and, as a result, a restrictive stance of monetary policy may be needed for longer than previously thought.”
However, he was quick to add a caveat, underscoring the nuances associated with interpreting yield movements. Jefferson added, “But I am also mindful that increases in real yields can arise from changes in investor’s attitudes toward risk and uncertainty.”
Jefferson assured his approach would be comprehensive and adaptive. “I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy,” he noted.
Vice Chair’s will weight the “totality of incoming data in assessing the economic outlook and the risks surrounding the outlook”.
Highlighting the delicate equilibrium that is to be maintained, Jefferson encapsulated the current scenario as a “sensitive period of risk management.” Here, the dichotomy lies in “balance the risk of not having tightened enough, against the risk of policy being too restrictive.”
