Neel Kashkari, the Minneapolis Fed president and opponent of interest rate hikes, on Friday said he was watching the bond market for affirmation that rates were at a neutral level, not too low to stoke inflation and not too high to cause recession.
But later in the day, a widely watched bond measure gave a recessionary signal, as bond markets globally reacted to new signs of an economic slowdown in Europe. U.S. stocks sold off at the sharpest rate since January.
Kashkari made no comment on the day’s market moves. About the time the market opened, he issued a series of comments on Twitter in support of Wednesday’s decision by the central bank’s policy committee to hold rates in place, likely for the year. His tweeted remarks came as a quiet period for participants in the meeting ended.
Kashkari wrote that his view about a target called the neutral interest rate, which influenced his opposition to rate hikes, may be outdated, possibly to the further detriment of the economy.
The neutral interest rate is one that is high enough to contain inflation but low enough to avoid recession. He wrote that, when he opposed rate hikes in 2017 and 2018, he didn’t think any of them put the country at risk of recession.
“My view of neutral has been 2.5 percent nominal,” Kashkari wrote. “But that might not be right. Neutral might be lower than I thought.”
The central bank’s current key rate is a range of 2.25 percent to 2.5 percent on a nominal basis.
Kashkari added he was watching the difference in bond interest rates for clues about the neutral rate.
“The very flat yield curve (2-10) tells me we are likely close to neutral,” Kashkari wrote, referring to the difference in rates for 2-year and 10-year U.S. Treasuries. “But there is a lot of uncertainty around it and we might be contractionary (I hope not).”
Not long after, the 3-month U.S. Treasury began selling for a higher rate than the 10-year, an inversion of the yield curve, a sign investors believe recession is coming.
For the last 50 years, each recession has been preceded by an inversion of the yield curve between short- and long-term bonds.
Long rates are normally higher than short. But there have been more inversions than recessions.
Kashkari has written in the past about keeping an eye on bond market signals. But his remarks Friday suggested the former banker and government official is joining a growing consensus among economists that the U.S. and large nations are settling into a pattern of lower growth.
A lower-growth equilibrium suggests that the neutral interest rate should be lower than in the past.
Some economists say the new, inflation-adjusted neutral rate may be as low as 0.5 percent, down from the historical rate of 2 percent.
As the leader of a regional Fed bank, Kashkari participates in all rate-setting meetings, but voting is rotated among the presidents. He last had voting rights in 2017 and will get them again next year.