The U.S. economy appears to be on solid footing. Unemployment is below 5% (considered full employment) and second quarter GDP growth is expected to top 4 percent. Fed Chairman Jerome Powell is also expected to hike interest interest rates a few more times this year in order tamp down inflationary pressures. Now some Fed Presidents want to take pains to prevent an inverted yield curve:
Some Fed regional bank presidents want the central bank to be cautious in raising interest rates to prevent short-term Treasury yields from rising above long-term ones — providing a kind of comfort that Greenspan gave equity investors. Those policy makers argue that such a yield-curve inversion has proven to be a reliable harbinger of past recessions …
Under the Greenspan put — which the then chairman denied ever existed — investors expected the Fed to cut interest rates if the stock market showed signs of cracking. A Powell put would operate in much the same way in the bond market. If the yield curve inverted the Fed would be expected to cut rates, thus pushing up prices of shorter-dated Treasury debt and lowering their yields.
For now Powell does not appear to be willing to change monetary policy mid-stream to avoid having the yield curve invert. However, howls for taking preventive action could grow louder. The yield curve has inverted just prior to the previous three recessions. Read more: