In a recent interview with CNBC, former U.STreasury Secretary Janet Yellen shared her insights on the current state of the U.Seconomy, particularly concerning the recent fluctuations in U.STreasury bond prices, rising yields, and the persistent issue of the federal budget deficitYellen emphasized that the unexpected strength of economic indicators has prompted the market to reassess its expectations for interest rates, leading to a sell-off of U.Sgovernment bonds.

Economic data plays a pivotal role in shaping market perceptionsYellen explained that when economic indicators show stronger-than-expected performance, it often results in altered expectations regarding the future trajectory of interest ratesThis means that rates could be higher than previously anticipatedConsequently, investors tend to reassess their portfolios, leading to the offloading of Treasury bonds, which in turn pushes bond prices down

The decline in bond prices is inversely related to yields, resulting in higher yields; this has been evident in the U.STreasury market's recent volatilityFor instance, on a Wednesday recently, the yield on the 10-year Treasury note rose to approximately 4.73%, marking its highest level since April of the previous year—a statistic that further corroborates Yellen's perspective.

Yellen also took the opportunity to discuss the normalization of term premium, which refers to the extra yield that investors demand for holding long-term bonds instead of rolling over short-term onesHistorically, this term premium had been at extraordinarily low levelsHowever, with the current positive trajectory of the U.Seconomy—characterized by strong performance across various metrics, stable economic growth, continuous improvement in the labor market, and manageable inflation—investor confidence regarding the future economic landscape has risen

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As a result, risk appetite has increased, leading to a gradual climb in the term premium.

Addressing inflation gives further insight into Yellen’s economic outlookShe candidly acknowledged that in recent months, the progress toward combating inflation has faced numerous obstacles and challenges, yielding little in terms of significant advancementsDespite this, she remains optimistic that prices are on a downward trend, even if the effects are not yet apparentYellen underscored that the labor market is not a source of price pressure; rather, it is relatively balanced in terms of supply and demand, with stable wage growth that has not unduly driven prices upwardThis series of observations showcases her constructive stance on the current inflation situation.

Nevertheless, Yellen's concerns regarding the federal budget deficit are palpableShe is well aware that enduring high levels of fiscal deficit could pose various risks for the U.S

economy—including heightened debt burdens, increased interest rates, and potential stifling of economic growthConsequently, she expressed a strong hope that the incoming government will prioritize this issue and take proactive steps to address itYellen specifically mentioned her desire to avoid a repeat of fiscal crises from decades past, symbolized by the term “debt vigilantes” who disrupt bond markets in response to unsustainable fiscal policiesShe emphasized the necessity for global investors to have confidence in the responsible management of U.Sfiscal policy, rather than waiting for market-induced reactions to trigger deficit reduction.

The plan proposed by the government to reduce spending as a means to curtail the deficit left Yellen skepticalShe raised questions about whether there would be sufficient leeway to make meaningful cuts outside defense and welfare programs, suggesting that this is a matter worthy of critical examination

Yellen also expressed doubt regarding the concept of a "government efficiency office," arguing that it is challenging to see how such efficiency metrics would be computed.

When addressing the inflation difficulties faced by the Democratic administration, Yellen indicated that the general rise in prices that has shamed the party largely stems from supply-side disruptions caused by the COVID-19 pandemicShe acknowledged that the stimulus package aimed at aiding recovery from the pandemic may have contributed to the ensuing inflation to some extent, but reiterated that such expenditures were essential.

Finally, when asked about her plans after leaving office, Yellen shared that she intends to take a vacation and return to the Brookings Institution to fulfill some rolesBefore her tenure in government, she was a distinguished fellow at this Washington think tankThis decision reflects her continued commitment to contributing to U.S