NEW YORK (Reuters) - The U.S. yield curve could invert later this year or early 2019, St. Louis Federal Reserve James Bullard said on Monday, in a market move in which short-term U.S. interest rates rise above longer-term bond yields, a scenario which has preceded recent U.S. recessions.
“We are at some risk of a yield curve inversion, later this year, early 2019,” Bullard told reporters after his speech on crypto-currencies at the CoinDesk Consensus 2018 conference in New York.
“If that happens, that would send a negative signal for the U.S. economy.”
Investors look at the U.S. yield curve for clues about the future economic outlook.
Bullard is not a voting member of the Federal Open Market Committee in 2018, but he will be next year.
“I want the yield curve to be an issue now, not after it inverts,” Bullard said. “So let’s see how that debate process goes.”
With the risk of a curve inversion, there is no need for the Fed to quicken its pace of increases on short-term rates, Bullard said.
“My personal opinion is that the Fed need not be so aggressive. That is unnecessary in a situation where inflation is stable.”
Traders still expect at least two more interest rate hikes this year, according to the CME’s FedWatch.
On Monday, the yield gap between U.S. 5-year notes and 30-year bonds narrowed to 25.90 basis points, the tightest spread in more than six years.
The other benchmark measure, the yield spread between U.S. 2-year and 10-year notes, steepened to 44.30 basis points on Monday. But last Friday, the spread contracted to 41 basis points, the narrowest gap since at least March 2010.
Bullard pointed out that the Fed has effectively flattened the yield curve because it has raised short term rates.
But he agreed with the general view that the curve has flattened because traders on the long end perceive that there is low inflation.
Bullard earlier spoke at a crypto-currency and blockchain conference in New York. He said the growth in bitcoin and other digital currencies is creating a “non-uniform” currency in the United States, which in the past has existed but was ultimately rejected and replaced.
Blockchain, the system powering cryptocurrencies like bitcoin, is a shared database that is maintained by a network of computers connected to the internet.
Reporting by Gertrude Chavez-Dreyfuss, Writing by Richard Leong; Editing by Chizu Nomiyama