The bond market is indicating that the U.S. economy could be hovering around a recession, which in turn would mean that fewer interest rate hikes are needed ahead, Minneapolis Fed President Neel Kashkari said Friday.
A flattening yield curve, or a narrowing between yields of different maturities, is indicating to the central bank official that confidence is waning and the Fed may be near the end of its rate-hiking cycle.
“It’s at least a yellow light flashing” about a potential recession, Kashkari told CNBC’s Steve Liesman in a “Power Lunch” interview.
That phenomenon is happening even as Congress has cut taxes and President Donald Trump earlier this year signed a $1.3 trillion spending bill, both moves that should be accelerating growth and causing the curve to widen.
“The fact that the yield curve is flattening into that is actually I think a sign that we may not be that far away from neutral,” or a rate that is neither stimulative nor restrictive, Kashkari said. “Every time somebody says that this time is different, it makes me nervous.”
Still, Kashkari has softened his stance against Fed rate hikes. He voted against all three in 2017 but has been less opposed this year, though he is not a Federal Open Market Committee voter.
The economy, he said, is getting closer to the Fed‘s dual mandate of full employment and a healthy inflation level that it sees as around 2 percent.
He suggested that a 2 percent funds rate probably would be appropriate considering that inflation is running around the same level. That would indicate just one or two more rate hikes, with the benchmark funds level now between 1.5 percent and 1.75 percent.
“We should be moving toward the neutral stance,” he said. “So now the question is, where is neutral? The fact the bond market is telling us the yield curve is flattening on the back of all this fiscal stimulus and tax cuts tells me that we are probably closer to neutral.”
Kashkari added that he is concerned about the potential for a trade war, though he still considers it “a lot of rhetoric and not a lot of action yet.”
