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Fed Study Says San Francisco Fed research blames low inflation, neutral rate There’s some risk that term premium could rise abruptly (Bloomberg) – This isn’t Alan Greenspan’s yield curve.
The gap between short and longer-term interest rates has been narrowing even as the Federal Reserve raises its policy rate, a trend that echoes the so-called ‘flattening’ of the curve between June 2004 and December 2005. Then-Fed Chairman Greenspan called the mid-2000s episode a ‘conundrum,’ but the leveling out is no mystery this time around, Federal Reserve Bank of San Francisco researcher Michael Bauer writes in a note called the Economic Letter. Low inflation and neutral interest rates as well as political uncertainty are all weighing on longer-dated bond yields, keeping them low even as the Fed boosts the cost of borrowing in the near-term, Bauer writes. That’s important, because it means that if price pressures pick up quickly, investors could begin to demand better compensation for holding longer-dated securities – reversing the flattening and potentially dinging stock market valuations, which are based partly on the low level of yields in the bond market.
This post was published at Wall Street Examiner by Anthony B Sanders ‘ November 20, 2017.