Fed's Neel Kashkari Still Sees Economy on Track Despite Yield Curve

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The American economy looks on track for continued growth, though the inversion of the yield curve may be signaling that the U.S. central bank may have set policy too tight, according to Federal Reserve Bank of Minneapolis President Neel Kashkari.

“While I don’t take the yield curve signals as gospel -- that it’s perfect -- I do think it’s giving us feedback on where neutral is,” he told Fox Business Network in an interview Friday, referring to the rate that neither speeds up nor brakes the economy. While Kashkari still doesn’t think the Fed has pushed policy above that level, he said it’s “certainly possible, and I don’t think we should be in a contractionary stance.”

Fed officials have paused further rate increases after moving four times last year and their latest forecasts, released last week, show no hikes at all during 2019 and just one in 2020.

While this dovish tilt has helped calm stock-market investors, bond yields have fallen sharply on concerns about weaker growth both in the U.S. and abroad. A closely watched segment of the yield curve inverted last week, with yields on three-month bills rising above those on 10-year Treasuries for the first time since 2007. The inversion may indicate investors now think lower interest rates in the future are more likely than higher rates, a development that has historically preceded U.S. recessions.

Kashkari said that a recession in 2020 is “certainly possible” because in any given year there’s always some small chance of a downturn a year or 18 months out.

“But it’s not my base case. My base case is still continued economic growth, continuing the expansion, just slower growth than we saw in 2018,” he said.

To contact the reporter on this story: Alister Bull in Washington at abull7@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Randall Woods

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