Fed Governor Sees Treasury Yields Slowing Economy, Expects Inflation Return to 2% Target
Rise in Treasury Yields and Its Impact on the Economy
Fed Governor Christopher Waller, during a discussion with former House Speaker Paul Ryan on Wednesday, expressed his view that the recent rise in Treasury yields is contributing to the slowdown of the economy. This effect is typically achieved through changes in Federal Reserve policy. Despite a report from the Labor Department indicating an increase in producer prices, U.S. stocks (DJIA SPX) advanced while the BX:TMUBMUSD10Y dropped 7 basis points to 4.59%.
Comparing the Current Economic Situation
Waller compared the current economic situation to earlier this year when a robust economy and looming inflation required contemplation of interest rate hikes. The Silicon Valley Bank’s collapse in March, which was expected to slow down the economy and diminish the need for rate hikes, did not lead to the anticipated credit crunch. As a result, projections for rate hikes were reinstated by summer.
Encouraging Inflation Data and Softening Wage Growth
The Fed Governor pointed out encouraging inflation data and a softening in wage growth, while forecasting a potential rise in U.S. GDP above 4% in Q3. Waller described these conditions as an “infamous soft landing,” a term used to describe an economy that slows down just enough to prevent it from overheating, but not enough to cause a recession.
Global Events and Monetary Policy
In regards to global events, Waller dismissed any immediate impacts of geopolitical incidents like Russia’s invasion of Ukraine and the Israel-Gaza conflict on monetary policy unless they broadly affect business and consumer confidence. He concluded by stating that if current trends persist, inflation will return to the Federal Reserve’s 2% target.
Fed Governor Christopher Waller believes that the recent rise in Treasury yields is contributing to the economic slowdown. Despite this, U.S. stocks advanced and Treasury yields dropped. Let’s delve into Waller’s insights and examine the current economic situation, inflation data, and global events.
Fed Governor Christopher Waller shared his concerns about the impact of rising Treasury yields on the economy. According to him, these increasing yields are responsible for the current slowdown. However, despite this situation, U.S. stocks managed to advance while Treasury yields dropped. It is worth noting that changes in Federal Reserve policy often play a role in achieving this effect. The recent report from the Labor Department, which revealed an increase in producer prices, did not hinder the positive performance of stocks.
Comparing the current economic situation to earlier this year, Waller highlighted the need to consider interest rate hikes due to a robust economy and looming inflation. Interestingly, the collapse of the Silicon Valley Bank in March, which was expected to slow down the economy and reduce the need for rate hikes, did not have the anticipated credit crunch effect. As a result, rate hike projections were reinstated by summer.
Waller also touched on encouraging inflation data and a softening in wage growth, which could potentially lead to a rise in U.S. GDP above 4% in the third quarter. Describing these conditions as an “infamous soft landing,” Waller referred to an economy that slows down just enough to prevent overheating without causing a recession.
Addressing global events, Waller downplayed the immediate impact of incidents like Russia’s invasion of Ukraine and the Israel-Gaza conflict on monetary policy. According to him, unless these events significantly affect business and consumer confidence, they are unlikely to have a direct impact on monetary policy. Waller concluded by expressing his belief that if current trends continue, inflation will return to the Federal Reserve’s 2% target.
