U.S. Treasury’s Yellen: Markets are functioning well

WASHINGTON (Reuters) -U.S. Treasury Secretary Janet Yellen on Tuesday said she has not seen signs of financial instability in U.S. financial markets even as they have experienced high volatility amid rising interest rates and concerns about strains on liquidity.

“We really haven’t seen signs of financial instability in the United States and our financial markets,” Yellen said in an interview with CNBC on the sidelines of the International Monetary Fund and World Bank’s annual meetings in Washington.

“They continue to function well, and we have not seen the signs of deleveraging of the kind that sometimes occurs in an environment of tighter monetary policy.”

Stock and bond markets have been under pressure for much of the year as the Federal Reserve has pivoted sharply from supporting the economic recovery from the coronavirus pandemic with low interest rates and trillions of dollars in bond purchases to attacking the highest inflation in 40 years with rapid rate increases and a reduction in its bond holdings.

That volatility has grown more severe since late summer when Fed Chair Jerome Powell sent a clear signal the Fed would not be distracted from its inflation fight, even if it meant painful consequences such as higher unemployment. Last month the U.S. central bank delivered its third straight three-quarter-percentage-point rate hike, and since then officials have shown no signs they are ready to slow down.

“I’m not going to talk about Fed policy, but it’s clear the Fed is committed … they’ve set out a plan for how they’re going to tackle inflation, and I think that’s pretty well understood by the market,” said Yellen, who served as chair of the Fed for four years before Powell was appointed to the job by former President Donald Trump.

“I don’t think we’ve seen anything that rises to the level of a serious concern.”

Yellen said she had no argument with the Fed’s approach and would not interfere with their decision-making.

“I believe strongly in Fed independence. It’s for the Fed to decide what’s the right path, but it is an art, not a science exactly. It’s always a matter of balancing risks,” Yellen said. “But I have confidence in the Fed to make a good set of decisions, and we’re not going to interfere.”

Yellen said she has kept a close eye on developments in Britain, where the Bank of England has been forced to pump billions of pounds of liquidity into local bond markets sent reeling by the new U.K. government’s costly fiscal plans.

“I have been watching U.K. developments quite closely,” she said. “I don’t want to comment on U.K. policy, but I am going to try to understand the impact of those policies and the rationale.”

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