Janet Yellen says inflation is actually being 'really well-behaved' as she strikes optimistic tone on jobs

Treasury secretary Janet Yellen is confident that American consumers, businesses and banks will be able to survive rising interest rates—and believes the Fed’s battle to slay the inflation dragon appears to be going rather well.

Yellen, who arrived in Marrakech this week for the IMF and World Bank annual meeting, also dismissed fears that a strong jobs report could actually prove to be a negative for the economy.

Yellen noted that core inflation—which excludes fast-moving prices in food and energy—is actually “really well-behaved” while speaking to the Financial Times.

Over the past 12 months inflation has been slashed, as the Fed raised rates to their highest levels in 22 years this summer to now sit at 5.5%.

It seems to be working. In August 2023 inflation sat at 3.7%, down from 8.3% a year prior. The August figure was also driven in part by an increase in oil which peaked at $3.984 per gallon in the third week of the month.

Yellen also refused to concede that a strong jobs report for September was anything other than a good thing for the U.S. economy.

The jobs report was published by the Bureau of Labor Statistics showed the economy added approximately 336,000 roles in the month, considerably higher than August’s net gain of 227,000 jobs.

Seemingly great news, right? Wrong. The market reacted skittishly, fearing a strong labour report could push the Fed into keeping rates higher for longer.

Yellen dismissed such concerns, saying the report was “impressive” and should be seen as “positive, not a negative.” She added that after all, the report implies “more people wanting to work and finding jobs.”

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

What about the bond rout?

Wall Street is less convinced by Yellen’s take on the jobs report, indicating its discomfort by a further sell-off in the bond market.

The U.S. Treasury market—the foundation of much of the global financial system—is currently seeing a 16-year-high in its 10-year bond yields. The sell-off isn’t just a headache for U.S. officials, as an increase in the cost of borrowing in the U.S. also lifts costs around the world.

But Yellen remained unfazed by the notion that interest rates is causing any “dysfunction” in the American market.

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

Her confidence was echoed, to some extent, by Wharton Professor Jeremy Siegel who wrote the economy’s strength shouldn’t lead the Fed to push for any further rate hikes.

“Is the economy too strong?” Professor Siegel pondered in his Wisdom Tree weekly blog. “Yields jumped in reaction to the employment report because there’s worry the Fed will stay higher for longer. The initial equity market reaction to the employment report was a drop, but it closed on Friday much stronger—which I think is the right reaction.”

He added that “none” of the data—no matter how strong—led him to think the Fed would increase rates again, given the fact there are still so many uncertainties in the economy.

These include the UAW strike, some weakness in the housing market and a continued threat of a government shutdown.

“I don’t think a one-tenth higher than expected inflation will force the Fed to hike,” Professor Siegel finished. “Maybe 0.2% to 0.3% hotter than expected inflation might cause to the Fed to hike.”

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