Fed's Bullard Blames Central Bank for Flattening Yield Curve

(Bloomberg) -- Blame the U.S. central bank for the flattening the yield curve, said Federal Reserve Bank of St. Louis President James Bullard, who urged his colleagues to avoid aggressive policy tightening that would push shorter-term rates above those on longer-dated Treasuries.

“It’s been the Fed, I think, that has flattened the curve more than worries by investors on the state of the global economy,” Bullard told reporters Monday in New York. “My personal opinion is the Fed does not need to be so aggressive that we invert the yield curve,” because inflation is relatively low and stable, he said.

Yield spreads between five- and 30-year Treasuries narrowed last week to their lowest level since August 2007. An inverted yield curve, which in the past has been a reliable signal of a future recession, could occur in coming months if the Fed follows through on its plan to raise rates two or three more times this year.

“I do think we’re at some risk of an inverted yield curve later this year or early in 2019,” Bullard said. “If that happens I think it would be a negative signal for the U.S. economy.”

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Investors expect the Fed to raise rates at their meeting next month for the second time in 2018 and follow through with projections for a third and maybe even a fourth increase before year end. That outlook is based on an economy which is running at a solid pace, sopping up labor-market slack and pushing prices higher.

U.S. unemployment fell to 3.9 percent in April, the lowest reading since 2000 and well below the level that Fed officials view as sustainable over the longer run, while inflation in March finally hit its 2 percent target after being under that goal for most of the past six years.

Bullard, who is not a policy voter in 2018 and favors keeping rates on hold, said that prior Fed rate hikes already represent “preemptive” steps to keep price pressures in check, which remain relatively low and stable.

His remarks were the latest on the yield curve from a U.S. central banker.

John Williams, who currently leads the San Francisco Fed but will switch to the helm of the New York branch in June, told an audience in Madrid on April 17 that while a truly inverted yield curve was a “powerful signal of recessions,” that was not the case at the moment.

“The flattening of the yield curve that we’ve seen is so far a normal part of the process, as the Fed is raising interest rates, long rates have gone up somewhat -- but it’s totally normal that the yield curve gets flatter,” Williams said.

--With assistance from Ben Bain and Brian Chappatta

To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net.

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Brendan Murray

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