Williams: Fed Shouldn’t Fear Inverted Yield Curve
The Federal Reserve shouldn’t hesitate to invert the yield curve if raising short-term interest rates above long-term yields becomes necessary to achieve the U.S. central bank’s targets, New York Fed President John Williams said.
“We need to make the right decision based on our analysis of where the economy is, and where it’s heading, in terms of our dual mandate goals,” Williams said Thursday while speaking to reporters after an event in Buffalo, N.Y. “If that were to require us to move interest rates up to the point where the yield curve was flat or inverted, that would not be something I would find worrisome on its own.”
Over the last six months, the yield on 10year Treasury notes has fluctuated around an average of 2.9%, while the yield on the two-year note — which is more sensitive to expectations about the federal funds rate — has risen about 0.4 percentage point. As a result, the spread between the two, known as the yield curve, has compressed to about the narrowest level since 2007.
“In thinking about the historical experience of the yield curve, we do have to be cautious about applying it to this current situation,” he said. “We and other central banks around the world have taken aggressive actions to buy lots of long-term assets, which has arguably pushed down the term premium, or the yield, on 10-year Treasuries.”