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Fed's Kashkari paying 'close attention' to flatter yield curve

Federal Reserve Bank of Minneapolis President Neel Kashkari said May 21 he is closely monitoring whether the Fed's rate hikes are posing a risk of inverting the yield curve.

Kashkari said the central bank's actions have contributed to the recent flattening in the yield curve, as yields for shorter-term Treasurys have increased quicker than those for longer-term Treasurys. Yield curve inversions have historically signaled an upcoming recession, prompting some analysts to sound the alarm over the Fed's plans to continue tightening monetary policy.

As of May 21, the spread between 2-year and 10-year Treasurys was around 48 basis points, much flatter than the roughly 100-basis-point spread last year.

While the yield curve has not inverted, Kashkari said, it could do so if the Fed hikes rates too fast or if longer-term rates do not climb up quickly enough.

"It really depends what happens to the long end of the curve," he said at an event in Michigan. "And so that's something I'm going to be paying close attention to, to get a sense of are we overdoing it, or are we coming close?"

Kashkari, one of the more dovish Fed officials, is not a voter this year on the Federal Open Market Committee, which is expected to raise its benchmark interest rates at least three times this year. Kashkari has repeatedly said the FOMC should be patient on those rate hikes, as there are signs that the labor market still has room to improve without an unhealthy increase in inflation.

"There might still be some slack in the labor market," he said. "There might still be people who are not counted in that 3.9% unemployment rate. So I've been saying, 'Hey, let's not overdo it. Let's allow the economy to continue to strengthen. And if we see wages pick up, we can always respond then.'"