Esther George believes the Fed's "important balance sheet" may have contributed to the reversal of the yield curve

Kansas City Fed President Esther George said the Federal Reserve may be partly responsible for reversing the yield curve.

"I think the Fed still has a big balance sheet and that it could put downward pressure on these long-term rates," LBC's Steve Liesman, George told the Kansas City Fed Economic Policy Symposium at LBC. Jackson Hole, Wyoming.

The benchmark 10-year Treasury yield has fallen twice below the 2-year return since August 14, resulting in a reversal of the bond's primary yield curve. The bond market phenomenon is historically a faithful sign of a possible recession; However, George said the Fed could influence the long run of this equation.

At its July meeting, the Fed decided to end the reduction of the bonds on the central bank's balance sheet two months earlier than planned. The balance sheet, which stands at about $ 3.8 billion, consisting mainly of treasury and mortgage-backed securities, has $ 4.5 billion as the Fed sought to stimulate the economy to exit. of the financial crisis.

"So we all know the history of the inverted yield curves and the worry that they anticipate a recession.But in the context of a declining global economy, I think that might explain some of it, "said George. "So, I will continue to watch this carefully, but I do not see the signal yet – this suggests that it's time to worry about a slowdown."

With more than $ 15 trillion in global government bonds trading at negative returns, investors are worried that the United States will be dragged into this global trend in the face of economic uncertainty. Although George is less convinced, the United States is close behind.

"I would never say, I do not see it – for the moment, in the United States," she said.

"Remember, we already have real interest rates at zero right now, if you are wondering where is inflation and where is the current rate of federal funds. so is not tight, in my opinion in the US, and I think if the economy grows up, I do not see a scenario for that yet, "George said.

George attributed the higher rates in the United States to the strength of the economy.

"I think if you look at the underlying performance of these other economies, you'll see that the US performs better than Europe, for example, and other parts of the world. have higher interest rates, "says George.

When asked if US rates were too high compared to other major developed countries, George responded that she did not "think that way."

"I tend to think that – these rates in the US reflect the underlying economy.The interest rates of other countries also reflect this.And to solve this problem, other policies need to be enforced in these countries, whether fiscal or monetary – really effect – that growth, "George said.

George was one of two members of the Fed to oppose the interest rate cut vote of 25 basis points in July. She told CNBC Thursday that the rate cut "was not necessary in my opinion".

Bond yields rose after George's comments.