CNBC
Dallas Fed President Rob Kaplan said Thursday he hopes the central bank can get the level of interest rates up to a “neutral” level before the yield curve inverts.
The yield curve is the spread between yields of shorter-term bonds and long-term bond yields. This spread has been narrowing all year. An inverted curve is when short-term bond yields actually go higher than long-term bonds. Historically, an inverted yield curve has been a good predictor of recessions.
In an interview with CNBC at the start of the Fed’s conference in Jackson Hole , Wyo., Kaplan said the Fed ought to raise rates by three or four quarter-point moves over the next nine to 12 months. That would get rates up near 2.75%, his definition of neutral, or the level of rates that neither stimulates nor restricts growth.
At the moment, the Fed has set its benchmark fed funds rate between 1.75% and 2%.
“I am hopeful we can get to neutral without creating an inverted yield curve,” he said.
Minutes of the Fed’s last meeting, released Wednesday, showed that central bankers were sharply divided over whether to pay attention to the yield curve. Some Fed officials dismiss its importance in this era of low global interest rates.
In the CNBC interview, Kaplan said he was in the camp of officials who think the yield curve is worth watching.
At the moment, Kaplan said the yield curve is telling him that the market has “sluggish” expectations for longer-term growth even though the economy is growing at a strong pace at the moment.
“The shape of the curve tells me that the medium-term outlook is a little bit more sluggish than the short-run economic indicators would suggest,” Kaplan said.
The Dallas Fed president, who will not be a voter for two years, said the shape of the curve was consistent with his forecast that GDP growth would slow to 2% annual growth rate in 2019 and 2020, from a 3% growth rate this year.