Crypto News: Economics Daily: Yellen unfazed

I'm Chris Anstey, a senior economics editor in Boston, and today I'm looking at Janet Yellen's take on the yield surge. Send us feedback and tips to ecodaily@bloomberg.net or get in touch on X (formerly known as Twitter) via @economics. And if you aren't yet signed up to receive this newsletter, you can do so here.

The ECB left rates unchanged for the first time in more than a year.
The American economy grew at the fastest pace in nearly two years.
Treasury Secretary Janet Yellen said US-China ties have improved.

Call it a reprise of the inflation debate.

When President Joe Biden was blamed for stoking inflation with his $1.9 trillion super-sized 2021 stimulus, his team argued that actually the price surge was a global phenomenon, so that couldn't be true. For a time, it was "Putin's price hike" — food and energy cost more thanks to turmoil from Russia's Ukraine invasion.

Now, it's bond yields that are surging, driven — many would argue — partly by concern with the US budget deficit, which is swelling even amid a strong economy.

Worries are such that a few bond market players say the Treasury next week may have to scale back an expected bump in longer-term debt sales.

QuickTake: Why Quarterly Treasury Report Is Drawing More Notice

But Treasury Secretary Janet Yellen waved away that angst in remarks Thursday at a Bloomberg event in Washington:

"I don't think much of it is connected to that — this is a global phenomenon in advanced countries. We're seeing yields go up in most" such economies, she said.

And indeed, yields have gone up across markets. Though because US Treasuries are the global benchmark, that was bound to happen regardless of the cause.

For his part, Federal Reserve Chair Jerome Powell says a heightened focus on deficits is a "candidate" for contributing to higher yields.

Video: Yellen Says GDP Shows Economy Is 'Doing Very Well'

Yellen said the main driver here is US economic resilience, something Powell also highlighted last week. That in turn "suggests that interest rates are likely to stay higher for longer," the Treasury chief said. She added that "we have to put forward fiscal plans that will keep the deficit manageable," and "the higher the interest-rate path the more that we need to do." (Click here to read the full transcript on the Terminal.)

But it's still possible yields come down in time, Yellen said. Many of the underlying trends that held them low pre-pandemic are "still in force," such as demographics, she said. And Powell indicated that sentiment among bond buyers is something that could shift in time.

How investors respond to the Nov. 1 debt-issuance plan from the Treasury will offer a good gauge of that sentiment.

Related Reading on Bloomberg.com:

The sixth annual Bloomberg New Economy Forum returns to Singapore Nov. 8-10 as the world's most influential leaders gather to discuss the global economy. This year's theme — "Embracing Instability" — focuses on opportunities to better understand underlying economic issues such as persistent inflation, geopolitical tension, the rise of artificial intelligence and the precarious state of the world's climate. Request an invitation here.

Spain's economy slowed slightly in the third quarter, as a drop in investment offset a boom in tourism.
Trade ministers from the world's most advanced economies will seek ways to strengthen global supply chains at a gathering in Japan this weekend.
The Fed may have to raise rates further to fight stubborn inflation amid a resilient US economy, Pimco's Richard Clarida said.
Chile's central bank slowed the pace of monetary easing as the recent plunge in the peso and rising geopolitical uncertainty stoke inflation fears.
Consumer price growth in Tokyo unexpectedly quickened in October, indicating a tougher inflation fight as the Bank of Japan prepares to set policy next week.
Inflation is proving so sticky in Australia that the institution responsible for taming prices faces the threat of a strike by staff demanding fatter paychecks.

Deutsche Bank economists, using a model derived from a financial conditions index (FCI) compiled by Fed staff, have run some calculations on how much work the bond market is doing for the US central bank.

Longer-term Treasury yields have seen the sharpest increase, by one measure, since the early 1980s. The moves since September amount to a roughly 0.6 percentage point drag on economic growth over the next year, according to the Deutsche model, using a daily calculation of the Fed's FCI.

"Based on recent research, this is roughly equal to three rate increases," economists led by Matthew Luzzetti wrote in a note Thursday. "A critical question for the policy path beyond November will be whether this tightening is sustained," they added — highlighting the importance of tracking financial conditions going forward.