Historically low level. She also criticized the Trump administration's plan to establish a “Government Efficiency Department” to address the deficit, labeling this approach as “mathematically unfeasible.”
The U.S. Debt Sell-off Due to Strong Economy, Not Crisis
Regarding the recent sell-off of U.S. Treasury bonds and the rise in yields, Yellen attributed it to the strong economic performance rather than a market crisis. She stated that stronger-than-expected economic data prompted the market to reprice the future path of interest rates, leading to a drop in bond prices and an increase in yields.
Yellen explained that the normalization of term premiums is also an important factor. The term premium is the additional yield requested by investors when purchasing long-term bonds, which has been at a very low level for some time and is now beginning to return to normal as the economy recovers.
Expectations for Future Inflation
Despite the limited decline in inflation in recent months, Yellen remains optimistic about inflation returning to a downward trajectory. She is convinced that the current labor market is not the main driver of inflation and believes that the gradual recovery of supply chains will ease upward pressure on prices.
Expectations and Concerns for the Trump Administration
For the incoming Trump administration, Yellen urged them to “seriously address the fiscal deficit issue” to avoid a situation similar to that of the 1980s when “bond vigilantes” forced the government to adjust policies. She emphasized that global investors rely on the U.S. to maintain a responsible attitude towards fiscal policy rather than being forced to cut the deficit by market pressure.
Plans After Leaving Office
Discussing her future, Yellen revealed her plans to initially take a vacation, after which she might return to the Brookings Institution to engage in academic research and write articles reflecting on her experiences during her tenure as Treasury Secretary.
Yellen's remarks offer key insights into current market focuses and underscore the complex relationship between fiscal policy and economic recovery. In the future, the Biden administration's deficit management and inflation trends will remain central topics of market attention.
