Yellen to warn of continued volatility as stocks plummet

Treasury Secretary Janet Yellen is set to tell the Senate Banking Committee Tuesday to be ready for continuing market fluctuations after stocks dropped to fresh 52-week lows on renewed fears of inflation and worsening geopolitical conditions.

“There is the potential for continued volatility and unevenness of global growth as countries continue to grapple with the pandemic. Russia’s unprovoked invasion of Ukraine has further increased economic uncertainty,” Yellen’s testimony, posted Monday, reads.

The Dow Jones Industrial Average of major U.S. companies fell more than 650 points to 32,245, a drop of nearly 2 percent. This was off a high last week of 34,061, spurred by reassurances from Federal Reserve Chairman Jerome Powell that the Fed wouldn’t increase interest rates by more than 50 basis points in its effort to quell rising inflation.

The S&P 500 index fell more than 3 percent, to 3,991, and the technology-heavy Nasdaq composite was down almost 4.3 percent, to 11,623, as tech stocks continued to take a beating. The Russell 2000 index of smaller companies dropped more than 4.6 percent on the day.

Despite Monday’s sell-off and recent market volatility, Yellen will testify Tuesday that “the U.S. financial system has continued to function in an orderly manner.”

That’s an argument that lawmakers may take issue with, as the economic recovery following the onset of the pandemic hasn’t exactly been uniform.

While corporations have been reporting record profits during the first fiscal quarter of this year, with some sectors faring far better than they were prior to the pandemic, inflation has surged and the labor market has tightened.

Last month, the consumer price index was up 8.5 percent on the year, the highest annual rise since 1981. Food, energy and wholesale prices in a variety of sectors have also risen to record highs.

This has caused the Fed to start raising interest rates in order to make it more expensive to borrow money and increase the purchasing power of the dollar. 

Last week, the Fed said it would raise its Federal Funds rate by half a percent, or 50 basis points, and signaled it would make similar moves over the next several months.

Despite a positive market reaction, a New York Fed survey released Monday showed that long term inflation expectations are on the rise.

“Median inflation expectations decreased in April at the one-year horizon to 6.3% from 6.6% in March,” a Fed summary said. “In contrast, median three-year-ahead inflation expectations rose by 0.2 percentage point to 3.9%.”

Uncertainty over inflation also increased, the survey showed.

Rep. Kevin Brady (R-Texas), the ranking member on the House Ways and Means Committee, criticized the Fed’s rate hikes as “modest.”

“The economic reality is that inflation is accelerating, job growth is slowing, and we are experiencing a serious wage-price spiral,” Brady said last week in a statement. “Surely the Fed must know that to beat inflation of this magnitude, ultimately interest rates must be higher than rising costs — so from the Fed’s modest rate hikes, it appears they are betting on a recession or some other economic shock to break the inflation cycle.”

At the Senate Banking Committee meeting Tuesday, Yellen will discuss the findings of a report by the Financial Stability Oversight Council, which was founded in the aftermath of 2008 financial crisis.

“The rapid pace of the economic recover this year was accompanied by growing pains, evidenced by supply chain problems or rising prices in many markets. Amid the national vaccination campaign, demand for many goods and services grew faster than the supply in the short run. As a result, commodity markets and associated derivatives recorded volatile prices. Inflation has risen and inflation compensation measures rose in financial markets. Lastly, supply chain bottlenecks and materials shortages affected a number of sectors,” the report said.

The report comes as China tightens lockdown restrictions in Shanghai, confining millions in their homes and adding to disruptions in one of the world’s leading economies, and as the war in Ukraine, which has affected energy and global food prices, enters its 12th week.