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When It Comes to Interest Rates, Mind the Curve

With the Fed anticipated to raise interest rates at their upcoming December meeting and throughout 2018, one Fed president is calling for caution. During a presentation to the Arkansas Economic Development Institute on Friday, December 1, St. Louis Fed President James Bullard warned of a possible “inversion” of the yield curve during 2018 if the Fed is not mindful of the relation between short-term interest rates and long-term rates.

An inversion of the yield curve can occur when Fed actions push short-term interest rates higher than long-term interest rates. This is traditionally considered a warning sign of economic weakness, although Bullard conceded that the yield curve is “not infallible” when it comes to forecasting economic strength.

Regardless, Ballard argued that the Fed should move cautiously when it comes to increasing short-term interest rates, so as to not overtake long-term rates. “The simplest way to avoid yield curve inversion in the near term is for policymakers to be cautious in raising the policy rate,” Bullard said. Calling inversion “”a naturally bearish signal,” Bullard added, “This deserves market and policymaker attention.”

The Federal Reserve’s Federal Open Market Committee voted this past summer to raise interest rates to 1-1.25 percent, the second rate hike of the year. The gradual uptick in interest rates is expected to continue in 2018, although the ongoing shakeup at the Fed makes it an open question. On November 6, President Trump nominated Jerome Powell to succeed Janet Yellen as Fed Chair, and the Senate Banking Committee is scheduled to vote on his nomination on Tuesday, December 5. Last week, President Trump nominated Marvin Goodfriend, a Carnegie Mellon economics professor, for a position in the Federal Reserve Board of Governors.

Bullard has served as CEO and President of the Federal Reserve Bank of St. Louis since 2008, when he succeeded William Poole. His career with the St. Louis Fed stretches back to 1990, when he joined the organization as an economist. He later served as vice president and deputy director of research for monetary analysis.

About Author: David Wharton

David Wharton, Editor-in-Chief at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has nearly 20 years' experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. He can be reached at [email protected]

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