MNI POLICY: Fed's Bullard: 'Real Possibility' of YC Inversion

--St. Louis Fed President Discusses The Potential Yield Curve Inversion 

By Sara Haire

     WASHINGTON (MNI) - St. Louis Federal Reserve Bank President James Bullard

gave remarks on "Assessing the Risk of Yield Curve Inversion: An Update" to the

Glasgow-Barren County Chamber of Commerce on Friday where he explained that

"...[I]mminent yield curve inversion in the U.S. has become a real possibility"

since he first spoke on the issue back in December.  

     The Federal Open Market Committee's median forecast for the federal funds

rate was updated to indicate two more rate hikes in 2018. Bullard argued on

Friday that given "tame inflation expectations, it is unnecessary to push

monetary policy normalization to such an extent that the yield curve inverts."

     Bullard is a non-voter on the FOMC this year. He is the last Fed speaker

before the FOMC enters quiet period Saturday ahead of the July 31-August 1

meeting. 

     There have been multiple studies about what the implication would be if the

yield curve inverts and most would suggest that a recession could follow after

the inversion. An inversion of the yield curve, Bullard said, would be a

"bearish signal for the economy" and would deserve market and policymaker

attention. 

     Bullard explained, again, that the current policy path suggests an

inversion "in late 2018," but explained there are a few different ways this

could be prevented from happening. 

     One would be for the FOMC to "be cautious in raising the policy rate," and

choose to look at "macroeconomic events" when deciding on the path of policy.

The other would be that "longer-term rates begin to rise in tandem with the

policy rate." 

     Despite Bullard acknowledging the latter as an option, he explained that

while it is possible that investors will look for greater prospects in U.S. in

the future, "it does not currently appear that there is a trend toward higher

real interest rates over a 10-year horizon."

     He also added that inflation expectations have been relatively muted which

has held down nominal interest rates and that there does not appear to be a

trend towards "increased inflation expectations in the longer run," Bullard

said. 

     Bullard acknowledged that it could be possible that "longer-term yields in

the US are being held lower in part because of the size of the Fed's balance

sheet." He suggested that one could adjust the yields for the magnitude of this

effect, but cautioned that the magnitude is "uncertain" and not clear on whether

it would be a better or worse predictor of future real activity. 

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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