Fed needs to move cautiously on interest rate hikes, Bullard says
US central bankers need to be more cautious, lest the interest rate curve 'invert', choking off growth, a top rate-setter said.
In remarks prepared for a speech, James Bullard, the president of the Federal Reserve bank of St.Louis, said "There is a material risk of yield curve inversion over the forecast horizon if the FOMC continues on its present course of increases in the policy rate. Yield curve inversion is a naturally bearish signal for the economy. This deserves market and policymaker attention."
Bullard explained that an inverted interest rate curve occurs when the yield on the one-year government note climbs above that on 10-year Treasuries.
Since 2014, the difference between the two had been decreasing as the central bank raised overnight rates, with the spread decreasing from 300 basis points at the start of that year to 73 basis points at present, he added.
The central bank official also noted that the regional Fed bank's policy recommendation - based on then available data and forecasts - was for no more interest rate hikes over the Federal Reserve's policy horizon.
"To be sure, yield curve information is not infallible and inversion could be driven by other factors unrelated to future macroeconomic performance. Nevertheless, the empirical evidence is relatively strong. Therefore, both policymakers and market professionals need to take the possibility of a yield curve inversion seriously."
"[...] The simplest way to avoid yield curve inversion in the near term is for policymakers to be cautious in raising the policy rate."
Bullard was not a voting member of the Federal Open Market Committee in 2017.