As the job market gains steam, Federal Reserve Chair Janet Yellen faces a massive challenge to adjust her monetary levers just right: She wants to keep the recovery going without stoking a bubble or spurring inflation. It’s a delicate balance that has bedeviled many central bank chiefs in the past.
A dramatic drop in U.S. bond yields over the past year might be just what Yellen needs to strike that balance, according to two International Monetary Fund economists.
“Having long-term rates at relatively low levels may actually give the Fed more degrees of freedom,” Nigel Chalk and Jarkko Turunen wrote in a blog post Thursday. That’s because low long-term government bond yields would act as a cushion to the Fed raising short-term rates (specifically, by supporting the housing sector).
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