Greece Inadvertently Makes Life Tough for Fed

Debt negotiations are breaking down and perhaps this time the almost-bankrupt nation will actually get kicked out of the euro-area’s shared currency. While global bond markets have mostly been brushing off the threat of a Greek default this year, they’re starting to care quite a bit more.

Why now? Because it’s clear that Greece and its creditors are no closer to resolving the nation’s financial woes, even as it rapidly runs out of cash and approaches deadlines to repay its debt. The potential for default and subsequent market turmoil prompted investors to pour money into the most-creditworthy bond investments on Monday, including U.S. Treasuries, sending yields to the lowest in more than a week.

Here’s the problem with that: The more investors flee to safer U.S. debt investments, the harder it’s going to be for the Federal Reserve to move away from its near-zero rate policies without causing disruptive market volatility, which it doesn’t want to do. So even if the world’s biggest economy seems to be growing steadily enough to handle non-crisis era monetary policies, a Greek exit could throw a wrench in the Fed’s plan to hike rates.