Minneapolis Fed President: "U.S. Treasury Market Functioning Normally... Long-term Yields Determined by Fundamentals"

"No Issues with Trading or Liquidity"
"Fed to Focus on Tackling Inflation"
"Treasury Market Management Belongs to the Treasury"
Decision on September Rate Hike on Hold

Neel Kashkari, President of the Federal Reserve Bank of Minneapolis and a leading hawk within the U.S. Federal Reserve (Fed), assessed that despite the recent surge in U.S. Treasury yields, the bond market continues to function normally. He has diagnosed that the increase in long-term yields has not escalated into market turmoil that would restrict the Fed's monetary policy operations.

Reuters Yonhap News

Appearing on the CBS program "Face the Nation" on the 23rd (local time), President Kashkari stated, "There are all the signs that the U.S. Treasury market is functioning normally," adding, "Trading is taking place, and there is liquidity in the market."

He continued, "This allows us to focus on the federal funds rate as the main policy tool to bring inflation back down," and went on to say, "I believe there is room to take the measures necessary to achieve the objectives mandated by Congress."

This means that, although U.S. Treasury yields have risen steeply in recent weeks, the financial markets themselves have not suffered any operational disruptions. Last week, U.S. Treasury yields rose across the board. The benchmark 10-year Treasury yield closed at 4.73% on the 21st. The 30-year yield also remained near its highest levels since 2007.

Kashkari evaluated that while current yields are high compared to recent years, they are not unusually elevated from a long-term historical perspective. He explained, "In the early 2000s, 10-year and 30-year Treasury yields were about the same as they are now, and in the 1990s, they were significantly higher than today."

He particularly emphasized that the recent rise in long-term yields cannot be explained solely by inflation or the Fed's monetary policy. President Kashkari remarked, "Many factors influence Treasury yields," and continued, "Inflation and inflation expectations are among them, and those fall under the Fed's remit. But other factors include investments in artificial intelligence (AI), government borrowing, and economic growth."

He went on to say that, over the long term, "the fundamentals of Treasury issuance, investment, economic growth, and productivity determine government bond yields worldwide, not just in the United States."

Regarding recent intervention in the bond market by U.S. Treasury Secretary Scott Bessent—such as expanding long-term Treasury buybacks—he drew a clear line in the division of responsibilities.

Kashkari stated, "I will leave the management of the Treasury market to the Treasury Secretary," adding, "That is the Treasury's job, and the Fed's role is to address the inflation aspect."

However, he also indicated that the recent rise in Treasury yields should not necessarily be viewed in a negative light. He explained that the stock market has shown strength in recent years, reflecting expectations that AI will boost productivity, and "A more optimistic interpretation is that the bond market is catching up with the stock market and has begun to reflect a higher growth trajectory."

He continued, "If productivity and growth rates in the global economy rise, we can expect higher interest rates worldwide," though he added, "I'm not saying this view is correct. For now, it is difficult to know which factors are playing the dominant role."

Careful about Rate Hike in September... "No Conviction Yet for Swift Return to Inflation Target"

Kashkari, who opposed a rate pause and pushed for a 0.25 percentage point increase at the July Federal Open Market Committee (FOMC) meeting, again expressed concern about inflation. However, he reserved judgment on whether to advocate for another rate hike at the September meeting.

He said, "There will be additional data released before the next FOMC meeting, and I do not want to make a decision in advance," but added, "At present, I am not confident that inflation will return to the target level in the short term."

He specifically pointed out that the war with Iran has emerged as a new inflationary factor. President Kashkari explained, "Conflict with Iran is now a major factor moving inflation," and continued, "Because energy affects every sector of the U.S. economy, the longer the conflict and instability persist, the greater the impact on the U.S. economy and inflation."

He said, "For the past five years we've said that inflation would return to target in a year or two, but that timeframe has continually been pushed back," concluding, "At some point, we will have to take further action." He added, "I'm not sure we are at that point yet, so we need to look at more data."

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