U.S. bond markets are signaling that the Federal Reserve is close to a neutral policy stance following three years of interest-rate hikes, according to a central banker who has consistently advocated for low borrowing costs in recent years.
“While I was opposed to earlier rate hikes I didn’t think we had yet crossed neutral and moved into a contractionary stance. My view of neutral has been 2.5% nominal. But that might not be right,” Minneapolis Fed President Neel Kashkari said Friday on Twitter.
As he tweeted, a closely watched section of the U.S. Treasury curve — the spread between 3-month and 10-year yields — turned negative for the first time since 2007.
“Neutral might be lower than I thought. In my view this is where the yield curve is helpful. The very flat yield curve (2-10) tells me we are likely close to neutral,” Kashkari said in a series of tweets. “But there is a lot of uncertainty around it and we might be contractionary (I hope not).”
Kashkari’s comments were the first public remarks from a Fed official — other than Chairman Jerome Powell — about monetary policy since the rate-setting Federal Open Market Committee surprised investors by forecasting no rate increases this year at a two-day meeting that ended on Wednesday.
The FOMC, on which Kashkari is a participant but does not have a vote this year, left the target range for its benchmark overnight rate unchanged at 2.25% to 2.5%. Powell, during his post-meeting press conference, cited downgrades to the outlook for economic growth, in part due to a slowdown abroad.
Weaker-than-expected European manufacturing data released Friday spooked investors, and another disappointing report on U.S. manufacturing later in the day was enough to send 10-year yields below 3-month rates, a market signal that suggests investors may believe interest rates will be lower on average over the next 10 years than over the coming three months.
That would imply Fed interest-rate cuts, and investors currently see a greater chance that the next move by the U.S. central bank will be a cut rather than a hike, according to prices on rate futures.
When asked during his press conference about the possibility of a cut, Powell said the data didn’t currently indicate “that we should move in either direction. They suggest that we should remain patient and let the situation clarify itself over time.”
Fed officials marked down their estimates for economic growth this year and next and saw unemployment running a little higher than previously anticipated, according to quarterly economic projections they released on Wednesday.
“A key question I am trying to assess is whether the recent slowdown in growth and jobs was real or a just blip. Need more time and data to assess,” Kashkari said Friday on Twitter. “Until we see wage growth net of productivity pick up and signal future inflation above 2%, I will continue to see slack in the labor market. If inflation is close to or below target and there is still slack, no need to tap the brakes.”
