(Reuters) - Financial markets are sending worrisome signals about the U.S. economic outlook and the Federal Reserve needs to “tread carefully” to keep the economy growing, a policymakers at the U.S. central bank said on Thursday.
St. Louis Federal Reserve President James Bullard said two particularly important signals were coming in the form of yields on different U.S. federal debt securities and on investor bets on the inflation outlook.
Bullard, who has a vote this year on the Fed’s rate-setting Federal Open Market Committee, or FOMC, released slides for a presentation at a community development event in Tupelo, Mississippi.
“These market-based signals indicate that the FOMC needs to tread carefully going forward in order to sustain the economic expansion,” according to one of the slides.
Bullard said in the slides that policymakers need to take seriously the possibility of a prolonged period in which interest rates are lower for short-term U.S. government debt than for long-term debt could signal a recession.
Market observers pay attention to numerous spreads between different U.S. Treasury securities.
Bullard said in his slides that some parts of the yield curve are already inverted. Indeed, currently yields the 3-year and 5-year U.S. Treasury notes are lower than those on 2-year notes and Treasury bills.
Bullard also noted that investors appear to be betting that inflation will fall short of the Fed’s 2 percent target rate in 2019 and also over the next five years.
Reporting by Jason Lange in Washington; Editing by Chizu Nomiyama