Fed Vice Chair Clarida Notes That Yield Curve Is Getting Flatter (But Inverted From 1 Year To 5 Years)

Former Columbia University economic professor and curret Fed Vice President Richard Clarida made one obvious point at a Dallas Fed meeting, and one half-truth.

(Bloomberg) — Federal Reserve Vice Chairman Richard Clarida said that when rates on shorter-dated bonds move above rates on longer-dated bonds, it can be a signal that an economic slowdown is coming.

“Historically in the U.S., inverted yield curves are actually pretty rare — they aren’t black swans, but they don’t happen a lot, and when they do happen that is typically a signal that the economy is either slowing sharply or could even go into a recession,” Clarida said Monday at an event at the Dallas Fed.

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Clarida drew a distinction between flat and actually inverted curves.

“Right now the yield curve in the U.S. is not inverted” but “it is getting flatter,” Clarida said. He noted that the Fed pays a lot of attention to whether the curve is flattening because of a fall in inflation expectations. And he said that monitoring the curve is complicated by the fact that U.S. markets are impacted by global demand for safe assets. “What happens in Europe and Asia can have an impact on our Treasury market, too.”

Well Professor Clarida, your statement is only partially correct. The US Treasury yield curve (green) is actually inverted from 1 year – 5 years. THEN upward sloping after 5 years. The US Dollar Swaps curve is inverted from 3 months to 4 years then upward sloping.

claridamirep

Now, if you want to talk about a downward sloping yield curve, take Venezuela. Please!

vencurveugh

Another curve that is shaped like a rollercoast at King’s Dominion is the US Dollar Overnight Indexed Swaps curve.

usdoiscurve

So Professor Clarida is only semi-correct about curve shapes. There is inversion from 1 year to 5 years, possibly signalling a slowdown (or recession) in the 1-5 year period.

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