Fed rate hike: will Yellen get it right?

New York

AS the job market gains steam, US Federal Reserve chairwoman Janet Yellen faces a massive challenge to adjust her monetary levers just right: she wants to keep the recovery going without stoking a bubble or spurring inflation. It's a delicate balance that has bedevilled many central bank chiefs in the past.

A dramatic drop in US bond yields over the past year might be just what Ms Yellen needs to strike that balance, according to two International Monetary Fund (IMF) economists.

"Having long-term rates at relatively low levels may actually give the Fed more degrees of freedom," Nigel Chalk and Jarkko Turunen wrote in a blog post last Thursday. That's because low long-term government bond yields would act as a cushion to the Fed raising short-term rates (specifically, by supporting the housin…