Minneapolis Fed President Neel Kashkari took his concern about an emerging warning signal on the economy to a wider audience Monday with an essay on the internet urging the central bank to stop raising interest rates.
"If the Fed continues raising rates, we risk not only inverting the [bond] yield curve but also moving to a contractionary policy stance and putting the brakes on the economy," Kashkari wrote in a post on Medium and the bank's website.
Since arriving at the Minneapolis Fed in 2016, Kashkari has urged the Federal Reserve's policymaking Open Market Committee to go slowly on raising interest rates. As a voting member of the committee last year, he opposed each of the three quarter-point hikes the panel approved.
Voting service is rotated among the presidents of the regional Feds and Kashkari, while continuing to participate in the committee's meetings, won't have a vote again until 2020.
At public events and in media interviews in recent weeks, Kashkari has pointed to the performance of the bond market as a new reason to support his view that the committee should rethink its plan to raise bank interest rates three to four more times this year.
The difference in yields between the 2-year and 10-year Treasury bonds has narrowed, or flattened when plotted on a graph, to the lowest level since 2007. If the 10-year yield falls below the level of the 2-year, the curve between them inverts. And for the last 50 years, each recession in the U.S. has been preceded by an inversion of the yield curve between the short- and long-term bond rates.
The curve has been flattening for months, prompting economists and market analysts to debate its meaning. Ben Marks, an investment executive in Minnetonka, wrote in Sunday's Star Tribune, "An inverted yield curve would no doubt be a powerful signal, but we are not there yet and other factors are at play."
He noted that economic-stimulus programs by the Fed and other central banks, chiefly through bond-purchasing programs, have helped to lower bond rates. Some writers have questioned the connection between the yield curve and recession, saying it's not that useful as a signal.
David Ader, a chief strategist at Informa Financial Intelligence, wrote on Bloomberg Monday that the economy is showing signs of "classic late-cycle behavior," or nearing the end of its upward stage, and the bond market is interpreting that performance correctly.
In his new essay, Kashkari cautioned against analysts who attempt to explain away the bond-market signal. "This time is different. I consider those the four most dangerous words in economics," he wrote.
Kashkari wrote that "we don't know for sure" how much of a concern the flattening yield curve is. "But we do know the bond market is telling us that inflation expectations appear well-anchored, the economy is not showing signs of overheating and rates are already close to neutral," he added.
"This suggests that there is little reason to raise rates much further."