WASHINGTON (Reuters) – Amid the recent financial market volatility, the interest rates on some long-dated government bonds have fallen below the level for short-term debt.
Called a “yield curve inversion,” this has been a traditional warning sign for the economy: If smart investors see more risk two years ahead than 10 years down the road, it can’t be good for near-term growth.
In response, President Donald Trump and others have upped demands for a U.S. Federal Reserve rate cut.
So do U.S. central bankers care about what Trump called the “crazy inverted yield curve” or not?
Policymakers have been trying to get a handle on the issue for a while, with no consensus on whether a curve inversion today means the same thing it did in the past.
Here are selected comments of Fed policy makers over the last two years on the issue:
Dec. 1, 2017: “There is a material risk…if the (Federal Open Market Committee) continues on its present course” – St. Louis Federal Reserve President James Bullard.
He was off by a few months, expecting a yield curve inversion late in 2018, but Bullard as well as Dallas Fed President Robert Kaplan flagged early on what might happen if the Fed continued to hike, as it did throughout last year.
(GRAPHIC: Fed’s Bullard was an early worrier about the Treasury yield curve -https://fingfx.thomsonreuters.com/gfx/mkt/12/4812/4769/Pasted%20Image.jpg)
Aug. 20, 2018: “I pledge to you I will not vote for anything that will knowingly invert the curve and I am hopeful that as we move forward I won’t be faced with that.” – Atlanta Federal Reserve President Raphael Bostic.
The comment captured the Fed’s dilemma at that point. The economy was growing faster than expected and seemed robust enough to warrant rate increases. Bostic voted for two more by the end of the year. Yet through the year, bond spreads narrowed.
(GRAPHIC: Fed’s Bostic pledged to avoid ‘knowingly’ inverting the yield curve – https://fingfx.thomsonreuters.com/gfx/mkt/12/4813/4770/Pasted%20Image.jpg)
Sept. 6, 2018: “I don’t see the flat yield curve or inverted yield curve as being the deciding factor in terms of where we should go with policy.” – New York Fed President John Williams
Williams was among the most vocal in saying that in the “new normal” economy, when all rates and the spreads between them were inherently lower, a yield curve inversion may be a product of structural changes in markets, and not the scary signal it used to be.
(GRAPHIC: Fed’s Williams did not see the yield curve sending warning signs – https://fingfx.thomsonreuters.com/gfx/mkt/12/4814/4771/Pasted%20Image.jpg)
Sept. 12, 2018: Lower overall rates and changing investor behaviour “may temper somewhat the conclusions that we can draw from historical yield curve relationships.” – Fed Governor Lael Brainard.
Some members of the Fed board agreed that the yield curve may not be as meaningful as in the past.
(GRAPHIC: Fed’s Brainard among those seeing yield curve as less meaningful – https://fingfx.thomsonreuters.com/gfx/mkt/12/4815/4772/Pasted%20Image.jpg)
March 24, 2019: “Some of this is structural, having to do with lower trend growth, lower real interest rates…In that environment, it’s probably more natural that yield curves are somewhat flatter.” – Chicago Fed President Charles Evans.
March 25, 2019: “I don’t take nearly as much information from the shape of the yield curve as some people do.” – Boston Fed President Eric Rosengren.
March 26, 2019: “I’m not freaked out.” – San Francisco Fed President Mary Daly.
That month, the spread between the three-month Treasury note and the 10-year bond, closely watched by some at the Fed, did invert. There remained division about what it meant and reluctance to read it as a sign of economic weakness.
(GRAPHIC: Fed’s Evans, Rosengren and Daly unperturbed by yield curve – https://fingfx.thomsonreuters.com/gfx/mkt/12/4816/4773/Pasted%20Image.jpg)
June 4, 2019: “We are early into it. It’s certainly something we’ll keep looking at.” – Fed Vice Chair Richard Clarida.
The Fed by this point was preparing for rate cuts, but even its leadership was not fully ready to put the yield curve at the centre of its thinking. In Clarida’s view, time matters: If the curve stayed upside down, he said he would take it “seriously.”
(GRAPHIC: Fed’s Clarida says long-running inversion would be taken ‘seriously – https://fingfx.thomsonreuters.com/gfx/mkt/12/4818/4775/Pasted%20Image.jpg)
June 25, 2019: “We do, of course, look at the yield curve … it’s one financial condition among many … There’s no one thing in the broad financial markets that we see as the dominant thing.” – Fed Chairman Jerome Powell.
The Fed did cut rates in July. The key, 10-year to two-year portion of the yield curve nevertheless inverted just two weeks later. It seemed a reaction to broader problems, including a sense that the U.S.-China trade war was becoming a bigger threat than thought, and the spread quickly moved back above zero.
But will that brief inversion be read as a warning?
The central bank next meets on Sept. 17-18.
(GRAPHIC: Fed’s Powell see yield curve among many indicators – https://fingfx.thomsonreuters.com/gfx/mkt/12/4819/4776/Pasted%20Image.jpg)
(Reporting by Howard Schneider in Washington; Ann Saphir in San Francisco; Trevor Hunnicutt in New York; Editing by Dan Burns and Cynthia Osterman)