As the gap between short- and long-term borrowing costs hovers near its lowest in more than 10 years, speculation has risen over whether the so-called yield curve is signaling that a recession could be around the corner.
Not to worry, two influential Federal Reserve policymakers said on Friday. Another, whose views are typically outside the mainstream at the Fed, disagreed.
Growth prospects look pretty strong, which is why the Fed is raising short-term interest rates, the two sanguine policymakers explained. Those rate hikes, they said, are in and of themselves acting to flatten the yield curve.
In addition, they argued, the curve will likely steepen as the U.S. government runs a bigger deficit and issues more debt, they said.
The calming comments, from the New York Fed’s incoming chief John Williams and from Chicago Fed President Charles Evans in back-to-back but separate appearances, appeared calculated to allay concern about a potential slowdown ahead.
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 U.S. Congress passed a budget deal that boosts U.S. government spending, following a December tax package that slashes corporate tax rates. Both changes are expected to lead to an increase in government borrowing in coming years.
Reference: Reuters
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