Yellen Says LT Yields Could Jump After Fed Hike

Federal Reserve Chair Janet Yellen said long-term interest rates are low and could jump when the central bank raises its benchmark rate.

“Long-term interest rates are at very low levels,” Yellen said in response to a question after a speech in Washington Wednesday. “We could see a sharp jump in long-term rates” after liftoff. Most Fed officials predict they will raise rates this year for the first time since 2006.

“We saw this in the case of the taper tantrum in 2013, where there was a very sharp upward movement in rates,” she said in reference to the episode in the middle of that year, when then-Chairman Ben S. Bernanke suggested that the Fed could start tapering its bond purchases in the next few meetings.

Yellen also said that after holding rates near zero since December 2008, the Fed must be on the lookout for threats to financial stability.

She said she sees signs of “reach for yield” in the market for leveraged loans, where the Fed is trying to ensure higher underwriting standards. Equity-market valuations are “quite high,” she said.

Even so, she said, risks to financial stability are moderate, not elevated.

Yellen also said regulators are “making some progress” in enhancing their monitoring of the so-called shadow banking system for emerging risks.

The Financial Stability Oversight Council has designated four non-banks as systemically important so far, along with eight financial market utilitites such as clearing facilities, putting them under the watch of the central bank.

Bloomberg

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