Even though the US economy is still showing strength, Treasury Secretary Janet Yellen said she was monitoring "potential vulnerabilities" amid serious headwinds. For the Treasury Secretary, bolstering the Treasury market is one of the immediate priorities. "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 meeting on Monday.
The current situation is dangerous and volatile. Yellen is concerned about the spike in energy prices and extreme volatility in financial markets.
These are conditions where "financial stability risks could materialize," Yellen responded to one of the questions following her speech.
Yellen cited a list of immediate issues and long-term structural challenges that are holding back the country's economic potential.
"We now face serious global headwinds and challenges with elevated inflation. Growth is slowing globally," Yellen said in her speech. Energy and food prices have risen, driven partly by the armed conflict in Ukraine and the pandemic's lingering effects abroad. "Climate change continues to devastate communities, exacerbating energy and food shortages in Europe and across the world."
Yellen's immediate priorities are to bring inflation under control and to monitor potential vulnerabilities in the financial system.
The Treasury Secretary's comments come as financial markets feel additional pressure from increased volatility. Recently, a mass sell-off in UK government bonds was resolved only when the Bank of England employed emergency purchases. In addition, Japan saw a steep fall in the yen, which made the government repeatedly intervene.
At the same time, the US market was strong enough, and the greenback remained the safe haven backed by the aggressive tightening cycle of the US Federal Reserve.
"To date, the US financial system has not been a source of economic instability. While we continue to watch for emerging risks, our system remains resilient and continues to operate well through uncertainties," Yellen said.
As for the US Treasury market, described by the Treasury Secretary as "the bedrock of our financial system," the plan is to enhance 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," she 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 cited sluggish productivity growth and job cuts as longstanding structural challenges. "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. And we've made a generational investment to expand our economic capacity. I believe that we can navigate through this current moment as well."
She also spoke about digital assets and stated that innovation must be in balance with proper regulation, as innovation without adequate regulation may lead to disruptions and harm. As part of this effort, the Treasury Department and its 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. Our goal is to realize the potential benefits of digital assets while mitigating and minimizing their risks," the Treasury Secretary stressed.
