When Federal Reserve Chair Jerome Powell testifies on Capitol Hill this week, investors will be looking for clues as to how issues like escalating trade tensions could alter the U.S. economy and therefore the Fed’s interest rate path.
Investors have also been watching another metric: the yield curve, which is flattening, with the gap between yields on the 10 and two-year U.S. Treasury bonds hitting a fresh 11-year low. Could this be the bond market sounding the alarm on the economy?
Some market watchers are concerned. Typically, a flattening or inverting yield curve — when longer-term yields fall at a faster pace than shorter-term yields — means that the market believes that the Fed will cut short its rate-hiking cycle because of a weakened economy. This has in the past foreshadowed economic slowdown and even recession.
On Monday, Minneapolis Fed President Neel Kashkari wrote in a blog post that is was time to pause rate hikes, citing the curve, warning that continued rate rises could lead it to invert and slam the breaks on the economy.
“Over the past 2.5 years, as the Federal Reserve has raised short-term interest rates, the yield curve has flattened dramatically, with the difference between 10-year and two-year Treasuries down from 134 basis points in December 2016 to 25 basis points today, a 10-year low,” Kashkari said.
But numerous investors are saying that this time it’s different.