Minneapolis Fed President Neel Kashkari said Dec. 18 he voted against a Federal Reserve interest rate hike partly because of the yield curve's flattening in recent weeks.
Kashkari, who dissented on the Federal Open Market Committee's three rate hikes this year, said in a statement today he has continually raised concerns that inflation has remained too low. Now, he said, recent trends in the yield curve also have his attention.
As of Dec. 15, yields for 10-year Treasurys were at 2.35%, while yields for two-year Treasurys were not too far below at 1.84%. The narrowing between the two, he said, have "only heightened my concerns" about the FOMC's trajectory.
"While the yield curve has not yet inverted, the bond market is telling us that the odds of a recession are increasing and that inflation and interest rates will likely be low in the future," he said. "These signals should caution the FOMC against further rate increases until it becomes clear that inflation is actually picking up."
Kashkari, who will not be a voting member of the FOMC next year, said inflation figures this year have been "perplexing." He attributed their sluggishness partly to "self-fulfilling" inflation expectations, with people thinking prices won't rise much in the future and therefore asking for smaller raises from employers.
Another likely reason, he said, could be that the U.S. economy may not actually be at full employment despite reaching a 4.1% unemployment rate. Kashkari said the recession pushed people out of the labor force and that there may be "more than a million workers still on the sidelines." If wages go up, he said, more people will come back and look for jobs.
"These trends suggest that monetary policy is entering a delicate phase," he said. "We all want the economic expansion to continue. However, continuing to raise rates in the absence of increasing inflation could needlessly hold down wage growth while potentially increasing the chance of a recession."
Chicago Fed President Charles Evans, the only other FOMC member to vote against the rate hike, also said inflation remains "too low" in a statement explaining his decision.