St. Louis Federal Reserve President James Bullard warned on Friday of a key “bearish signal” emerging for the economy if the Fed continues raising interest rates as fast as policymakers currently intend, and called on his colleagues to move more cautiously in the drive to more normal monetary policy.
Bullard said that as it stands, within a year short-term interest rates, pushed higher by Fed action, may move above long-term interest rates — an “inversion” of the yield curve that is classically taken as a signal of economic weakness.
It is unlikely that long-term rates will move higher on their own to keep pace with the Fed’s moves on short-term rates, he said, which he felt should make the Fed slow down.
“The simplest way to avoid yield curve inversion in the near term is for policymakers to be cautious in raising the policy rate,” Bullard said in a presentation to the Arkansas Economic Development Institute.
With the spread between one-year and 10-year Treasury bonds currently around 0.73, and the latest Fed forecasts showing three rate increases next year, the yield curve could invert during 2018.
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