Attention to Financial Market Risks by Fed Chair Powell and Others

Rising US Treasury Yields Amid Inflation Pressure... Treasury Secretary Yellen and ECB President Lagarde Say "We Must Watch Carefully"

[Asia Economy Reporter Park Byung-hee] As stock and commodity prices, including Bitcoin, soar, policymakers around the world have begun to worry about financial market instability.

With the U.S. 10-year Treasury yield rising intraday to as high as 1.39% due to inflation concerns, global stock markets are also showing signs of volatility.

According to Bloomberg News on the 22nd (local time), Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), shared an assessment at last month's Fed meeting emphasizing the need to pay attention to financial stability risks. Janet Yellen, U.S. Treasury Secretary, also recently stated in an interview with CNBC that there are "areas that need to be carefully monitored" when asked about the possibility of speculative overheating.

Bloomberg interpreted the remarks by Chairman Powell and Secretary Yellen as "continuing stimulus measures while simultaneously expressing concerns about financial market bubbles." It explained that policymakers are facing a dilemma where difficult decisions must be made. The economy is deeply mired due to COVID-19, prompting aggressive stimulus policies based on ultra-low interest rates, but at the same time, asset values in financial markets are soaring, increasing bubble risks.

In fact, although the global economy is facing its worst situation since World War II, global asset markets are hitting record highs. West Texas Intermediate (WTI) crude oil prices have risen about 27% this year alone, recovering to $60 per barrel. Copper prices have surpassed $9,000 per ton for the first time in 10 years, and corn prices are also at their highest in 8 years.

If these phenomena faithfully reflect economic recovery, there is no problem, but if prices have soared due to liquidity from ultra-low interest rates, the financial markets could face chaos from a sharp price drop in the future.

Jerome Powell, Fed Chair, Janet Yellen, U.S. Treasury Secretary, Christine Lagarde, ECB President (from left) [Image source= AFP, Reuters, Yonhap News]

These concerns are reflected in the bond market. Bond yields have risen sharply this year, reflecting both expectations for economic recovery and concerns about inflation.

The U.S. 10-year Treasury yield, which reached 1.39% intraday, closed at 1.36%, up 0.02 percentage points from the previous trading day. Considering that the yield was 1.06% at the end of last month, it has risen 0.30 percentage points this month alone. Christine Lagarde, President of the European Central Bank (ECB), said at the European Parliament that she is closely monitoring long-term bond yields in the U.S. and the Eurozone.

The sharp rise in U.S. Treasury yields is also raising concerns that asset market bubbles could burst suddenly. The New York Stock Exchange fell sharply by 2.46% on the day due to inflation concerns and the burden of rising U.S. Treasury yields. The market analyzed that the continued rise in U.S. yields has weighed on the stock market, especially technology stocks.

Meanwhile, the market is focusing on Chairman Powell's congressional testimony on the 23rd. Powell is scheduled to appear before the Senate Banking Committee on the 23rd and the House Financial Services Committee on the 24th. He is expected to emphasize the need for stimulus measures. However, market participants are particularly interested in his comments on the possibility of asset bubbles and his views on the recent rise in U.S. Treasury yields. Powell has consistently stressed the importance of stimulus measures while also regularly warning about asset bubbles.

Secretary Yellen and Chairman Powell say the U.S. economy remains vulnerable. They recently stated that although the official unemployment rate announced by the Labor Department is 6.3%, the actual unemployment rate is close to 10%.

Regarding the recent surge in Bitcoin prices, Yellen repeatedly stated that Bitcoin is a speculative asset. Bitcoin surpassed $50,000 for the first time on the 16th and then its market capitalization exceeded $1 trillion. It briefly surpassed $58,000, approaching $60,000, but on the 22nd, it plunged as much as 17%, breaking below the $50,000 level. The rise slowed after Tesla CEO Elon Musk said Bitcoin seemed expensive. The rapid rise and fall of Bitcoin is interpreted as a typical example of an asset bubble, which could increase market anxiety.

This content was produced with the assistance of AI translation services.