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Kashkari: Fed should take yield curve flattening 'seriously'

Minneapolis Fed President Neel Kashkari agrees with Federal Reserve Chair Janet Yellen that the yield curve creates an "imperfect comparison," but he said it is showing some concerning signs.

Kashkari, one of two dissenters in last week's Federal Open Market Committee decision to raise interest rates, wrote in an essay a day earlier the yield curve's flattening in recent months has added to his concerns about the FOMC's path on rate hikes. An inversion between the yields of 10-year Treasurys and two-year Treasurys has typically signaled an upcoming recession.

A flatter yield curve has "historically been a sign of nervousness" that future economic growth will be slower than expected, reiterating his concerns that Fed officials need to hold off on rate hikes until inflation rises at a faster rate, he said at a Dec. 19 event in Minnesota.

During her last news conference, Yellen said that "there are good reasons to think that the relationship between the slope of the yield curve and the business cycle may have changed."

Kashkari said she was right that it has become "a little bit hard to compare" today's yield curve to ones from decades ago, given that the Fed's asset purchases during the recent economic downturn may have shifted the picture by likely lowering the term premium, or the extra compensation investors get by holding longer-term Treasurys.

"I'm not disagreeing with her. I do think it is an imperfect comparison," he said. "But I do think there's information contained in the fact that we've been raising rates, Congress is now passing this tax package, and the long end of the curve is not moving. That is telling me that the bond market is worried about the growth prospects going forward and inflation prospects going forward, and we should take that seriously."