(Kitco News) Even though the U.S. economy is still showing "significant strength," Treasury Secretary Janet Yellen said she is monitoring "potential vulnerabilities" amid severe global headwinds. And one of the immediate priorities for Yellen is to bolster the Treasury market.
"We are at an important moment for the global economy. In the United States, we are focused on transitioning our economy to stable and sustained growth. The U.S. economy retains significant strength. But inflation remains too high, and we are contending with serious global headwinds," Yellen said during her speech at the Securities Industry and Financial Markets Association Annual Meeting Monday.
The current environment is "dangerous and volatile," and Yellen is concerned about the spike in energy prices and extreme volatility in financial markets.
It's an environment where "financial stability risks could materialize," Yellen said, responding to one of the questions following her speech.
Yellen cited a list of immediate challenges and long-term structural pressures that have held back America's economic potential.
"We now face serious global headwinds and challenges with elevated inflation. Growth is slowing globally. And energy and food prices have risen, driven partly by Putin's terrible war in Ukraine and the pandemic's lingering effects abroad," Yellen said in her speech. "Climate change continues to devastate communities, exacerbating energy and food shortages in Europe and across the world."
Yellen's immediate priorities are to get inflation under control and to monitor potential vulnerabilities in the financial system.
The U.S. Treasury Secretary's comments come as financial markets feel additional stress from increased volatility. Just recently, a big selloff in U.K. government bonds was resolved only when the Bank of England employed emergency purchases. Also, Japan saw a sharp fall in the Japanese yen, which forced repeated interventions by the government.
The U.S. market, however, has been fairly strong, with the U.S. dollar remaining the go-to safe-haven currency backed up by the aggressive tightening cycle of the Federal Reserve.
"To date, the U.S. financial system has not been a source of economic instability," Yellen said. "While we continue to watch for emerging risks, our system remains resilient and continues to operate well through uncertainties."
On the U.S. Treasury market, which Yellen described as "the bedrock of our financial system," the plan is to strengthen its ability to absorb shocks.
"The Treasury market today is reflecting greater uncertainty about the economic outlook, but trading volumes are robust and investors are able to execute transactions. However, in the past few years, we have seen some episodes of stress in this critical market," Yellen noted. "These episodes underscore the importance of enhancing its resilience. Treasury is working with financial regulators to advance reforms that improve the Treasury market's ability to absorb shocks and disruptions, rather than to amplify them."
Yellen is also carefully watching increased market volatility, potentially exposing vulnerabilities in nonbank financial intermediation. "Financial regulators have been working together to better monitor leverage in private funds and develop policies to reduce the first-mover advantage that could lead to investor runs in money market funds and open-end bond funds," she said.
The Treasury Secretary listed sluggish productivity growth and declining labor force participation as longstanding structural issues. "Of course, there are serious challenges directly ahead of us. And I know it has been a tough few years for the American people. But our progress thus far shows what our country can do. We have experienced among the strongest recoveries of any major advanced economy … I believe that we can navigate through this current moment as well."
She also spoke about digital assets, stating that innovation must be balanced with proper regulation. Innovation without adequate regulation can result in significant disruptions and harm. As part of that effort, the Treasury Department and its agency counterparts recently completed the federal government's most comprehensive review of digital assets. These reports represent our most significant effort yet to promote responsible innovation in this area," she said. "Our goal is to realize the potential benefits of digital assets while mitigating and minimizing their risks."
