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Janet Yellen sees no market ‘dysfunction’ from US bond rout


The surge in borrowing costs has not created dysfunction in US financial markets, Treasury secretary Janet Yellen said as she struck an optimistic tone about the capacity of banks, businesses and households to weather higher interest rates.

Speaking at the start of this week’s IMF and World Bank annual meetings in Marrakech, Yellen dismissed concerns about the rout in the $25tn market for US government bonds, which has pushed the yield on the 10-year Treasury note to the highest level since 2007 and dragged up borrowing costs in other countries.

“I haven’t seen any evidence of dysfunction in connection with the increase in interest rates,” she told the Financial Times. “When rates are more volatile, sometimes you see some impact on market function, but that is pretty standard.”

She added that she was not aware of “anything that is particularly unusual”.

The sell-off gathered momentum on Friday following the release of the latest jobs report, which showed significantly stronger than expected monthly payroll gains. More than 330,000 positions were added in September, about twice economists’ expectations, sowing concern that the world’s largest economy is retaining too much momentum for inflation to be fully tamed.

Yellen described the jobs report as “impressive”. The growth is a “positive, not a negative”, she added, reflecting “more people wanting to work and finding jobs”.

Despite September’s hiring surge, which followed months of moderation, wage growth continued to slow and labour force participation — the number of Americans either employed or looking for work — steadied around its pre-pandemic level. 

“It’s consistent with a path in which, on balance, you are not seeing more labour market tightness,” she said, noting that core inflation, which strips out volatile food and energy prices, was “really well-behaved”.

“What could be a problem is if we saw the labour market overheating, but I didn’t really see evidence here of that,” Yellen added.

The Federal Reserve has said the labour market would need to soften in order to get price pressures down. But it maintained that a painful recession could be avoided, even as it recommitted at its last policy meeting in September on the need to keep interest rates elevated for an extended period.

Officials are debating whether to raise the policy rate one more time this year or hold it throughout most of 2024. The federal funds rate stands at a 22-year high of 5.25-5.5 per cent following one of the central bank’s most forceful efforts to raise borrowing costs in decades.

Speaking on Monday, Philip Jefferson, the Fed’s second-in-command, doubled down on the need for the central bank to “proceed carefully” with its forthcoming rate decisions, emphasising that he would incorporate rising Treasury yields into his assessment of whether tighter monetary policy is necessary.

In separate comments, Dallas Fed president Lorie Logan went so far as to say that the recent move in financial conditions could offset the need for the central bank to take further action.

Yellen rejected concerns that banks could suffer a repeat of the turmoil earlier this year that followed a sharp jump in borrowing costs.

Weakened banks had taken steps to address their vulnerabilities, she said. This included paring back uninsured deposits, which make a lender susceptible to a run if customers get spooked. Moreover, she said credit quality on the whole was “very solid”.

“[With] the rate rise in and of itself, it’s not obvious that it is putting a huge amount of pressure on households or businesses,” she said. 

At the annual meetings, the Treasury secretary is expected to focus on efforts to shore up the financial firepower of the World Bank and the IMF. The US wants to increase support to emerging and developing economies, tackle climate change more directly and counter China’s growing international influence. 

The effort to rally countries to inject more capital into these multilateral institutions does not address the issue of underrepresentation for countries such as China and emerging economies, which have less voting power than their economic standings might suggest. But Yellen acknowledged that was a debate for the future.

“We think the formula needs to be reconsidered,” she said of the IMF’s quota system, in which the US is the biggest shareholder and China, despite being the world’s second-largest economy, retains the third most powerful weight behind Japan. 

Beyond the relative size of each respective economy, Yellen said: “It is also important for China to live up to the norms of the institution when it comes to things like co-operation on debt restructuring and things like foreign exchange transparency.” Beijing has been criticised for delaying the resolution of thorny debt workouts, such as the one in Sri Lanka, for which it is the biggest official creditor.

The Treasury secretary will also this week be pressed about US support for Ukraine, after Congress scrapped aid in order to avert a government shutdown last month. That funding is now in limbo amid political dysfunction in Washington following the removal of Kevin McCarthy as Speaker of the House of Representatives.

Yellen said the Biden administration was “completely committed to getting this funding for Ukraine”, adding that officials “strongly believe that a majority of both Democrats and Republicans are supportive of that”.



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