Anecdotal evidence also suggests that inflation fears contributed to the spike in yields. Indeed, in 1994, the political pressure on the Fed to slow the tightening cycle was high. All Reserve Bank Presidents were invited to explain their views before the House and Senate banking committees, which was unprecedented.
According to commentators, this public dispute damaged the credibility of the Fed, contributing to the inflation scare. In my view, two important lessons seem to emerge from the 1994 episode: •  First: Clarity regarding central banks’ “reaction functions” is crucial to avoid sharp movements in yields.