November 14, 2019 / 5:22 PM / a month ago

Fed's Bullard: 'More normal' yield curve bullish sign for 2020

LOUISVILLE, Ky., Nov 14 (Reuters) - The reaction of U.S. bond markets to recent Federal Reserve interest rate cuts could be a “bullish” factor for the economy next year, St. Louis Federal Reserve president James Bullard said on Thursday, noting some standard market-based recession warnings have lifted.

Bullard was among the earliest policymakers to flag concerns about a possible “inversion” of the yield curve, a traditional warning sign of doubts about the health of the economy when short term securities pay a higher rate of interest than longer term ones.

But after inverting this year, the yield curve for Treasury investments has edged back to the normal upward slope in which investors are rewarded with a higher rate of interest for committing money for a longer period of time, Bullard said.

“The (Federal Open Market Committee) has taken actions that have changed the outlook for shorter-term U.S. interest rates considerably over the last 12 months, ultimately providing more accommodation to the economy,” Bullard said in prepared remarks to the Rotary Club of Louisville.

“Key measures of the U.S. Treasury yield curve have now returned to a more normal, positive slope, possibly a bullish factor for 2020.”

The Fed has reduced interest rates three times this year, cutting its target policy rate by 0.75 percentage points to a range of 1.5% to 1.75%. Bullard was among the main advocates for lower rates.

On Thursday, he said the actual level of support provided for the economy may be much larger than that, since the Fed at the start of the year also took planned rate hikes off the table.

All told, the Fed’s policy shift was perhaps the equivalent of a 1.32% drop in rate expectations this year, “a very large change over this time frame,” Bullard said. “The bottom line is that U.S. monetary policy is considerably more accommodative today than it was as of late last year.”

That policy shift, he said, appears to be taking hold, with the change in the shape of the yield curve a main bit of evidence.

The gap between 2-year and 10-year Treasury note yields is now positive, as are other closely watched “spreads” such as that between the 2 year Treasury note yield and the Fed’s target rate. Both had been negative, even if briefly, at some point last year.

Reporting by Howard Schneider Editing by Chris Reese

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