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Moderate US recession may push Treasury yields close to zero, Fed economist says

A mild recession in the U.S. may bring short- and longer-term Treasury yields down to unprecedented levels, restricting the Federal Reserve's ability to support a recovery, according to Michael Kiley, a deputy director in the Fed's financial stability division.

In a research published Jan. 8, Kiley presented two recession scenarios in which interest rates on Treasury securities change from October 2019 levels by the same degree as seen during the moderate recessions experienced in 1990 and 2001. In those scenarios, rates on maturities ranging from one-day to seven or 10 years were at zero or below that level, the Fed official said.

"The scenarios illustrate that a recession may result in near-zero interest rates at long maturities, bringing U.S. experience closer to that seen in Europe and Japan," said Kiley, one of the top economists of the Fed's board.

During the 1990 and 2001 recessions, Kiley said the average decline in the 10-year Treasury yields was 1.7 percentage points over a period covering six months prior to the start of a recession and the two years that followed it.

"Interest rates typically decline notably over the several years following a recession" regardless of the extent of the downturn, Kiley said.

The Fed, which moved to an easing cycle with a trio of rate cuts in the second half of 2019, saw long-term rates fall throughout the year amid worries over slowing economic growth. The 10-year Treasury yield ended 2019 at 1.92% in December, marking the steepest annual decline since 2011, according to CNBC.

Low interest rates are expected to remain for "some time" in the U.S. and advanced economies, Kiley said in his research.