Fed Policymakers Say “Not to worry” No Recession Ahead
As the gap between Short and Long-term borrowing costs hovers near its lowest in 10+years, speculation has risen over whether the yield curve is signaling that a recession is around the corner.
Not to worry, 2 Federal Reserve policymakers said Friday
Growth prospects look strong, which is why the Fed is raising short-term interest rates, Those rate hikes are in and of themselves acting to flatten the yield curve.
In addition the curve will likely steepen as the US government runs a bigger deficit and issues more debt.
Those comments came from the New York Fed’s incoming chief John Williams and from Chicago Fed President Charles Evans in back-to-back but separate appearances were made to allay concern about a potential slowdown ahead.
“The yield curve is not nearly as much of a concern as I might have pointed to a couple months ago,” Evans said in Chicago after a speech, in response to a reporter’s question.
Mr. Williams, who will leave his current job as San Francisco Fed president in June to take over at the New York Fed, also said he expects the Fed’s shrinking balance sheet will help steepen the curve by putting upward pressure on longer-term rates.
In January the US Congress passed a budget deal that boosts government spending, following The Trump Tax Reform that slashes corporate tax rates. Both changes may to lead to an increase in government borrowing ahead.
The Fed policymakers reason that a bigger supply of debt should put downward pressure on Treasury prices and deliver a corresponding lift to yields.
“We’ve got more fiscal debt in train in the US That has to be funded,” and will likely push up long rates and steepen the yield curve, Mr. Evans said.
At their March FOMC meeting officials “generally agreed that the current degree of flatness of the yield curve was not unusual by historical standards,” according to the meeting minutes.
Since then, longer rates have come closer to being overtaken by short rates, a phenomenon known as yield curve inversion, which has been a reliable precursor of past recessions.
Have a terrific weekend.