May 21, 2018 — Fed Presidents Worry about an Inverted Yield Curve


Last week three Fed presidents brought attention to the dangers of raising rates too fast which could result in an inverted yield curve.  Historically, an inverted yield curve has been seen as a predictor of an impending recession.

Fed Presidents Bullard (St. Louis) and Kaplan (Dallas) are calling for a pause in raising interest rates to avoid an inversion where short-term borrowing rates exceed longer term yields. They feel inflation is currently stable, and further action on rates is unnecessary.  Fed President Bostic (Atlanta) is aware of the dangers, but still favors three rate hikes this year, though he reserves the right to modify his views.

Richard Clarida, Trump’s nominee for Fed Vice-Chair, says he supports a balanced approach that will ensure full employment in conjunction with price stability.  San Francisco Fed President Williams feels differently. He said last week he is positive about the US and global economic outlook, and reiterated three to four rate hikes in 2018 are appropriate as inflation is nearing 2 percent.

It is rare that all the Fed Presidents agree how quickly rates should rise in an unpredictable future. But one can take advantage of the favorable conditions that are available, and hedge against few, or many, future interest rate hikes.  Swaps remain the best option at this time.