Janet Yellen says bond-market moves can complement the Fed's monetary policy - but there's a big 'if'

• Janet Yellen said that bond market reactions to data anticipating Fed moves is helpful, per Reuters.
• But that's only if markets are "thoughtful" about the data that informs the Fed's next moves.
• "If markets are thoughtful when reading the data, it can be helpful as a complement to monetary policy."

Markets have been touchy about the Fed's next policy moves, with stocks and bonds whipsawing on recent data points that inform where the economy may be headed.

That's actually helpful for the central bank, says U.S. Treasury Secretary Janet Yellen, but there's also a catch.

"The Fed obviously wants to create financial conditions that are consistent with bringing inflation down and the markets anticipate future fed moves based on their reading of incoming data," Yellen told reporters from Reuters on Wednesday, referring to recent moves in the bond market.

The way markets react to data is a helpful policy tool, she said, though it comes with a caveat.

"If markets are thoughtful when reading the data, it can be helpful as a complement to monetary policy," she added.

That's a big "if."

Treasury yields have taken a nosedive since last month after a soft inflation print hinted the Fed may be done hiking rates. And on Wednesday, yields slid as private payrolls data showed further cooling in the labor market ahead of Friday's jobs report. Yields on the 10-year note are quickly falling back toward 4% after touching 5% in October for the first time since 2007.

That twitchy reaction to economic data comes as the central bank has been saying they are taking a "data dependent" approach to adjusting interest rates. As a result, investors have been eyeing statistics on inflation and jobs data like hawks, responding to every bump and wiggle in the market.

Yellen's call for a "thoughtful" market interpretation of data echoes notes from other commentators, like former Fed economist Claudia Sahm who has cautioned investors about the quality of federal data that they react to.

Economist Mohamed El-Elrian has also warned that the Fed is too numbers-driven and is constantly reacting to stale economic readings.