The recent flattening of the U.S. Treasury yield curve is being driven by global unease about the impact of coronavirus epidemic in China and not new pessimism about the health of the U.S. economy, said Federal Reserve Vice Chairman Richard Clarida on Friday.
“I am not today concerned about the inverted yield curve,” Clarida said in an interview on Bloomberg Television.
The recent inversion is an instance where money flows into the U.S. due to global unease “and that tends to lower yields,” he said.
The 10-year Treasury note traded at 1.531% on Friday, pushing it below its 3-month counterpart to invert the so-called yield curve.
An inversion of this spread has historically presaged a U.S. recession in postwar history. Some analysts say “this time is different” because interest rates and inflation rates are so low in the world’s wealthiest countries.
Clarida said it was “too soon to tell” what the ultimate impact of the coronavirus epidemic will be on the Chinese economy, global growth, or the U.S. economy.
“We will take it meeting-by-meeting. If this were to resolve in a one-or-two quarter slowdown in growth, that is probably not something that changes the big picture,” he said.
“But, it is a challenging situation and we’re going to keep on top of it.”
Clarida is the first Fed official other than Fed Chairman Jerome Powell to speak following this week’s FOMC meeting, where the Fed kept policy steady and said it was watching to coronavirus carefully.
Read: Wrap-up of Fed meeting
The Fed’s No.2 said the Fed was not conducting policy based on movements in asset prices.
Interest-rate policy was appropriate to “keep the economy humming,” he said.
Clarida said he thought the policy stance would push inflation up “just a bit” to the 2% target.
“We’re not that far away” from 2% and the three rate cuts last year will help push inflation higher, he said.