BUFFALO, NY (Reuters) - A possible yield curve “inversion” should not be a deciding factor for the Federal Reserve as it debates further interest rate increases, even though it should be studied carefully, New York Fed President John Williams said on Thursday.
The gap between short- and long-term bonds would naturally be narrowing as the Fed raises short-term interest rates, particularly given that the Fed’s holdings of trillions of dollars in long-term securities are keeping long-term rates down.
“I don’t want to mechanically apply the math or the evidence from previous periods to this one. Some of the flattening is due to the effect of QE on long-term yields,” Williams said, referring to a quantitative easing program that saw the Fed acquire long-term assets. An inverted yield curve “would not be something I would find worrisome on its own...I don’t see an inverted yield curve as being a deciding factor in terms of thinking about where we should go with policy.”
Reporting by Howard Schneider; Editing by Andrea Ricci