CHICAGO/SAN FRANCISCO (Reuters) - As the gap between short- and long-term borrowing costs hovers near its lowest in 10 years, some investors worry the so-called yield curve is flashing red: that a recession, always preceded by such a flattening, could be around the corner.
Not to worry, two Federal Reserve policymakers said on Friday; the curve will likely steepen as the U.S. government runs a bigger deficit and issues more debt, they said. And anyhow, growth prospects ahead look pretty strong, which is why the Fed is raising short-term interest-rates.
Those rate hikes, they said, are in and of themselves acting to narrow the gap between short- and long-term rates.
The comments, from the New York Fed’s incoming chief and from Chicago Fed chief Charles Evans in back-to-back but separate appearances, appeared calculated to allay concern about a potential recession.
“The yield curve is not nearly as much of a concern as I might have pointed to a couple months ago,” Evans said in Chicago after a speech, in response to a reporter’s question.
Williams, who will leave his current job as San Francisco Fed President in June to take over at the New York Fed, also said he is not so worried about the flat yield curve and expects it to steepen somewhat. The Fed’s gradual slimming of its $4 trillion-plus balance sheet will also put upward pressure on longer-term rates, he said.