Despite two hikes of the Federal Funds rate this year, ranging between 1.75 percent and 2 percent, long-term rates have not kept pace, causing the yield curve to flatten and stoking fears of a recession.
Just about every time the U.S. Treasurys yield curve has flattened in the past, the U.S. economy has tanked shortly afterwards. Yet Federal Reserve chairman Jerome Powell told Congress that he intends to keep gradually raising interest rates “for now.”
“[Federal Reserve Bank] Chairman Powell is bullish on the economy, but we’re concerned he’s overly bullish on the pace of rate hikes,” said George Rusnak, co-head of global fixed-income strategy at Wells Fargo. He worries that a newly aggressive Fed could hasten a downturn in the currently strong economy. “The market doesn’t think the future growth and inflation are there.”