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HONG KONG (Reuters) – Charles Evans, chairman of the Chicago Federal Reserve, said on Monday that it was understandable that markets were nervous when the yield curve flattened, even though he was still confident as to the prospects for economic growth in the United States.
In the view of many ominous for the economy, 10-year US Treasury yields fell below three-month rates on Friday for the first time since mid-2007, a reversal that had in the past reported the risk of recession.
After an unexpected rise in the business climate index of the Ifo Institute in March in Germany, the spreads between US Treasury yields at three months and 10 years have become positive.
Evans described the reversal as "quite narrow".
"We must take into account the secular decline in long-term interest rates," Evans said in a statement at the Credit Suisse conference on Asian investment in Hong Kong, just days after the Fed put an end to its tightening and abandoned plans for further rate increases in 2019.
"Some of these factors are structural, linked to lower trend growth, lower real interest rates," he said. "I think in this environment, it's probably more natural that yield curves are a little flatter than in the past."
On the sidelines of the conference, Evans told CNBC in an interview that he could understand why investors were more "vigilant, attentive and attentive," adding that the Fed was doing the same. But, he added, economic fundamentals were "good" and he was expecting growth of about 2% this year.
"Your first reaction is going to be" wow, it's less than what we had "and I think that's missing the message."
The risk of a shock to the economy was not unusually higher or lower at the moment, he then told reporters.
Speaking at the same event, former Fed Chairman Janet Yellen said the yield curve might indicate the need to reduce interest rates at some point, but not so much. recession.
"Unlike past times, the yield curve tends to be very flat," said Yellen, who led the Fed between 2014 and 2018.
BREAK TIME
Speaking out of the outlook for monetary policy, Evans told the conference that the time had come for the US central bank to pause and adopt a cautious attitude, adding that it did not anticipate any rise in interest rates until the second half of next year.
He said the labor market remained strong, but noted that inflation expectations had declined slightly and that there were risks badociated with the slowdown in economic activity in China and elsewhere. the uncertainty surrounding Brexit and mitigating the effects of US fiscal stimulus.
Evans, who voted on the interest rate policy this year, has toned down in recent months, saying monetary policy was neither accommodative nor restrictive at this stage.
"I see things are holding back inflation a bit, and I want to see inflation soar, so my own way is not to expect an increase in the fund rate. before next year, probably, in the second half, "Evans said.
And even if prices begin to rise, he said, "given the current weakness of inflationary pressures, an increase of 2.25 to 2.5% does not worry me much for the moment."
This valuation suggests that Evans set the bar high enough for a further rate hike, as inflation measured by the Fed's preferred tonnage barely exceeded the 2% target set by the Fed before the financial crisis.
He added that, faced with downside risks and uncertainties, it is prudent for the Fed to wait for more economic data.
He also said that a rate cut was a possibility if the economy slowed down further or if inflation was too low.
This echoed the opinion of his counterpart, Atlanta Fed Chairman Raphael Bostic, who said Friday that both possibilities were open to him.
In January, Evans said the Fed could raise interest rates three times in 2019 on the badumption that the US economy remains relatively strong.
Last week, the US central bank left its rates unchanged in a range of 2.25% to 2.5%. New forecasts showed that 11 of the 17 Fed decision makers did not expect any rate changes for the rest of the year, compared to only two in December.
This unexpected and accommodating signal has led financial markets to quickly anticipate a rate cut next year.
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