John Williams, who takes the helm of the powerful Federal Reserve Bank of New York in June, played down risks the yield curve would become inverted as the US central bank gradually raises interest rates.Speaking in Madrid Tuesday, the current president of the Feds San Francisco branch said a truly inverted yield curve is a powerful signal of recessions that historically has occurred when the Fed is in a tightening cycle, and markets lose confidence in the economic outlook.
That is not the case now, he said.The flattening of the yield curve that weve seen is so far a normal part of the process, as the Fed is raising interest rates, long rates have gone up somewhat -- but its totally normal that he yield curve gets flatter, Williams said.
The spread between 2- and 10-year US Treasury yields is the narrowest in over a decade as investors price in a slightly steeper pace of Fed tightening.
Williams, who sees three or four rate hikes in 2018 -- placing him solidly with the majority of policy makers --said that I dont see the signs yet of an inverted yield curve.Williams will become a key member of Fed Chairman Jerome Powells leadership team when he takes charge in New York on June 18.
That team was augmented Monday by President Donald Trumps announcement that he plans to nominate Pacific Investment Managements Richard Clarida as vice chairman.Interpreting market signals will be a key job for Williams in New York, where hell be the Feds key eyes and ears on Wall Street.
A potential source of risk has emerged in recent weeks with the widening in the spread between Libor -- the London interbank offered rate -- and the overnight indexed swap rate, which has risen to levels unseen since the financial crisis.
Williams played this down.