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.”
BoE’s Mann highlights concerns over extended inflation duration
BoE MPC Catherine Mann emphasized the significance of the duration of inflation in guiding her future policy decisions.
Mann pointedly remarked, “Going forward, a very important ingredient for my decision-making is the duration of inflation, and how long it is exceeding target.”
The MPC member expressed concerns that prolonged inflation above the target could lead to a “drift” in medium-term expectations. Monetary policy “has to be more aggressive, because it has to address both a drift in expectations as well as the actual inflation above target,” Mann further elaborated.
Mann also warned of the challenges that could arise if inflation remains persistently above the target. “If inflation gets embedded for longer above target, then getting it to target is going to require more policy action for longer and that I’d rather not have to do because people become backward looking,” she said.
In the context of future economic shocks, Mann anticipates an “upward bias” in inflation, suggesting that a higher neutral rate of interest is “a very plausible outcome.”