The yield curve inverting doesn’t scare Federal Reserve Vice Chair for Supervision Randal Quarles, he said, and he doesn’t see it predicting a recession.
“We need to see what might be causing yield curve inversion,” Quarles responded to a question at the Shadow Open Market Committee meeting, noting that it’s not unusual for short-term rates to rise faster than long-term rates in a normalization cycle. “I don’t view it as much of a harbinger of a recession.”
In the past, inverted yield curves have generally preceded recessions.
About the balance sheet, Quarles said, it is better to view it in terms of percentage of GDP rather than by amount, and it has shrunk as a percentage of GDP in recent years.
In his presentation, Quarles said, he is “very comfortable remaining patient at this point” with interest rates “and monitoring the incoming data.” But, he added, “My sense is that further increases in the policy rate may be necessary at some point, a stance I believe is consistent with my optimistic view of the economy's growth potential and momentum. In the language of central banking, my estimate of the neutral policy rate remains somewhat north of where we are now.”
The SOMC meeting, under the auspices of the Manhattan Institute, focused on Fed communications. “Communicating a data-dependent policy framework can be challenging, especially if we do not want to appear to be overly discretionary,” Quarles said.
“It would probably be clearest if we defined what data we are dependent on and how we depended on those data — that is to say, if we adopted a monetary policy rule," Quarles noted. "Strict rules, however — to achieve their valuable heuristic benefit — are as much about ignoring some data as they are about paying attention to other specific data. Indeed, while rules provide useful and important benchmarks, the complexity and evolving nature of the economy at the current juncture argue for the consideration of a wide range of indicators in assessing the state of that economy. This, in turn, can complicate the communication of data dependence: How can we adopt and convey a clear strategic stance on policy while maintaining our credibility if evolution of the data requires an evolution of that strategy?”
Instead, Quarles said he “prefer[s] a framework where we make it clear that we are focused on broad trends.”
