In a speech this afternoon, Fed Chair Yellen faces a high-pressure economy with a new twist on monetary policy. In this twist, Fed Chair Yellen surprised investors by putting forth the possibility of repairing damage induced by the financial crisis. Overall, this move may lead to fluctuation in mortgage-backed securities.
Yellen Faces High-Pressure Economy
Fed Chair Yellen said that a “high-pressure economy may be the best approach to repair the damage done during the financial crisis”. A high-pressure economy entails waiting longer in the business cycle than in the past to raise the federal funds rate.
However, this approach risks increasing inflation. Fed Chair Yellen noted that there is a distinct possibility for inflation rise above their 2% target level.
Overall, many among the Federal Reserve team hope for better business investment as Yellen faces a high-pressure economy. With a long-term loose monetary policy, additional businesses may feel incentivized to invest in the United States.
Also, this policy holds potential to increase the number of workers whom return to the United States workforce. While the strategy of waiting longer to raise the federal funds rate is bold, this tactic may be quite effective in the long-run. Time will tell.
Looking Ahead
As Fed Chair Yellen faces a high-pressure economy with a loose, long-term monetary policy, long-term bond yields rose. In addition, mortgage-backed securities increased as well.
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