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St. Louis Fed president warns about potential recession

St. Louis Fed president warns about potential recession GLASGOW â€" The president of the Federal Reserve Bank of St. Louis said in Glas...

St. Louis Fed president warns about potential recession

GLASGOW â€" The president of the Federal Reserve Bank of St. Louis said in Glasgow on Friday that while the economy is good now, a recession is possible in the next few years if certain factors stay on their current track.

James Bullard, one of the nation's top economists, made the remarks as part of a presentation at the Glasgow-Barren County Chamber of Commerce's quarterly breakfast meeting. The Federal Reserve Bank at St. Louis' eighth district covers all of Arkansas and portions of seven other states, including 64 counties in western Kentucky, and one of its three branch offices is in Louisville.

Bullard is a member of the Federal Open Market Committee of the Federal Reserve System â€" the central bank for the United States also known as “the Fed” â€" and it is the FOMC that sets the policy short-term interest rate.

It has made two s mall bumps upward in the rate already this year and the intent of two more bumps over the rest of the year has been expressed for an overall gradual rate of increase.

Bullard's comments Friday focused on the yield curve â€" an illustrative representation of long- and short-term interest rates in relation to one another â€" and its importance as a strong predictor of recessions, plus what needs to happen to prevent the trend that typically is followed by a recession.

“What's happening is that the Fed is raising the short-term interest rate and the longer-term interest rates really aren't going up all that much, so that's called a flattening of of the yield curve, because short-term rates are getting to be the same level as the longer-term rates, and over the last seven and a half-months, since I first started talking about this, this curve has gotten even flatter than it was at that time.”

So he wanted to provide an update to his remarks abou t the issue that he first made in Little Rock, Arkansas, in early December, he said.

Longer-term debt yields are normally higher than short-term yields, but when the yield on shorter-term government debt exceeds that of longer-term yield, that is called an inversion.

“Our policy rate is our short-term rate, and we've been raising the policy rate since really December 2015, but especially during 2016 and coming into 2017 and up to now. Long-term rates haven't gone up as much …,” Bullard said. “I think there's a risk of yield curve inversion in the near term here. In monetary policy we're kind of thinking two years ahead. So if the FOMC continues to raise the policy rate, you might get this yield curve inversion, and if that happens, that's a bearish signal for the U.S. economy, so that's why Wall Street is revved up about this issue and policymakers like me are talking about it. … The idea is that's why you would care about thi s issue.”

He said one way such an inversion could be avoided is if the longer-term rates would go up.

“If that happens, all this issue would go away,” Bullard said, “but that seems to not be happening. … So my bottom line is, I don't think you have to be so aggressive on policy to get to this yield curve inversion. One way to avoid yield curve inversion is just for the committee to not go quite as fast or at all maybe with raising the policy rate. Then this issue would go away.”

Ten-year yield is typically considered longer-term, compared with a one-year treasury yield, so he used those as the benchmarks in his discussion. The spread between those was close to 300 basis points at the beginning of 2014 and the same spread as of July 12 is only 46 basis points, he said, because of the increasing short-term rates but longer-term rates that aren't really moving.

“Because of this there's a material risk that the nominal yield curve wil l invert over the forecast horizon,” Bullard said.

When the spread â€" or difference between the percentage points for the two types of yields â€" goes below zero, that's another representation of the inversion, and it has been on an overall downward trend since 2014; Bullard displayed graphics that illustrate that.

Supposing that longer-term yields remain near current levels and the FOMC remains on track with its plan to raise the policy rate at the pace suggested in the Summary of Economic Projections, the curve would invert in late 2018 or perhaps early 2019, Bullard said, recapping the two primary ways that could be avoided.

The SEP is essentially the “fearless forecast,” as Bullard put it, of the FOMC's members and the plan forward.

“One of the reasons I started talking about this last December is I wanted to trigger a debate before we got to the actual point of inversion, and that has certainly happened,” Bullard said. “It's b een a major topic both on Wall Street and in policymaking circles. … Financial markets care deeply about this type of thing.”

Bullard also displayed a chart illustrating that yield curve inversions have occurred before each of the recessions in around 1990-91, 2001 and 2008-09.

When the slope of the curve goes negative â€" below zero â€" “not too long after that we get a recession,” he said. “[It's] a very reliable predictor of future recessions in the U.S. In fact, the yield curve has inverted before every recession in the whole post-war era and only sent one false signal in that whole time period since World War II. So it has been a very reliable signal, and that's why people are concerned about it.”

He said things look good today, with unemployment extremely low, for example, “but this is a game of looking out over the next two years, of what our market's saying about the next two years, and they're not saying a very good thing to the extent this yield curve is flat.”

The Glasgow Daily Times asked at a news conference after the breakfast event what type of timeline to expect if everything, including the Fed's intention of gradual increases in interest rates, continues as is.

"Historically it's been a bearish signal and it would be a year or more even after the inversion that you would see a downturn," Bullard said later. "One of my messages here in Glasgow was that if there's just one thing you want to do personally based on the current situation it's to think about people in your extended family or your circle of friends or in groups that you know and think about people that have been marginally attached to the workforce, because this is a great time for them to find a job and find a place where they can settle down in the labor market, and that will put them in a great position when a new recession does come and they'll be s et up in a job they can count on."

He re-emphasized that economic numbers look good now, but this process is about trying to look ahead over the two years as to how things will proceed. The FOMC predicts the economy will slow down in 2019, but one of the questions will be how sharply it will do so.

The St. Louis Fed's policy rate recommendation is flat over the forecast horizon, barring an increase in longer-term yields, and he does not anticipate much of an increase there, if any, he said, offering his rationale for that projection, particularly in relation to slow inflation movement.

“What I've been recommending is that we go slow, even slower than we have gone, and with that we react more to the data as it comes in about the economy and do things less on a schedule ...,” Bullard said. “This risk of yield curve inversion is best avoided by policy caution. … I think this deserves market and policymaker attention. … I just think it's u nnecessary for the committee to try to push ahead so hard as to invert the yield curve.”

At his conclusion, he answered several questions from the chamber audience at the Community Center of the T.J. Health Pavilion.

He had already been in town for a day before this event. He had toured two local industries â€" Felker Bros. and SpanTech, the under-construction Barren County Area Technology Center addition/football stadium combination and the T.J. pavilion, and he had attended a dinner for agribusiness leaders Wednesday evening, he said later.

Three members of the Louisville branch's board of directors and Nikki Jackson, the branch's senior vice president, who Terry Bunnell said worked on the arrangements to get Bullard as a speaker, were also at the meeting.

Bunnell is president and CEO of The Peoples Bank, which was the sponsor for Friday's event.

Source: Google News US Business | Netizen 24 United States

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