(Reuters) - The narrowing gap between yields on long-term and short-term Treasury bonds to little more than the equivalent of one rate hike from the Federal Reserve has helped sour at least one U.S. central banker on any further interest rates increases.
Minneapolis Federal Reserve Bank President Neel Kashkari, who does not vote this year on Fed policy but takes part in the U.S. central bank’s regular discussion of interest-rate policy, said Monday that the flat yield curve means interest rates are close to neutral.
“This suggests that there is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger a recession,” he said in a blog post. “If inflation expectations or real growth prospects pick up, the Fed can always raise rates then.”
The Fed has lifted interest rates twice this year already, and last month signaled it will likely do so twice more before the year is out, in large part because unemployment, at 4 percent, is low by historical standards, inflation has begun to perk up, and stimulus from tax cuts and government spending are forecast to boost growth further.
Still, the gap between yields on the ten- and two-year Treasuries hit a fresh 11-year low earlier Monday and is currently around just 25 basis points.
(Graphic: The Incredible Shrinking Yield Curve - reut.rs/2NiIZy4)
A yield curve is said to invert when yields on short-term debt exceed those on long-term debt. Research shows that a recession nearly always follows such inversions - though exactly how long after is unclear.
Still, Kashkari’s view is not shared by many of his policymaking colleagues, who have generally downplayed the warning signal he sees in the flattening yield curve.
They instead point to the behavior of yields in shorter-term markets that they say points to no particularly elevated risk of recession, and warn that the bigger risk is in raising rates so slowly that inflation surges out of control.
Fed Chairman Jerome Powell testifies Tuesday before Congress, though it is not known if he will address the topic then.
Among Fed policymakers who do see a flashing yellow light in the flattening yield curve - among them, Dallas Fed President Robert Kaplan - Kashkari stands nearly alone in calling for a pause in rate hikes. Kaplan told Reuters Friday he would not knowingly do anything to invert the yield curve, yet he also said he continues to support further rate hikes.
Reporting by Ann Saphir and Noel Randewich; editing by Diane Craft and Nick Zieminski
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