What Has Happened to the Yield Curve Since Liftoff?

Chris Waller: Now, where are we on the yield curve? Well, this is what the yield curve was when we lifted off. And then in December of 2017, we had raised the short end but the long end didn't move. So the yield curve is flattening.

And this is when Jim, my boss, started saying, this isn't good. If this doesn't move and we keep raising the rates up to 3% like we're talking about, this thing is going to be-- it's going to invert. And that's-- that was what Jim started talking about back in November and December of last year.

Now, since up until today, or last couple two weeks ago, we've raised it up a bit. The market's come up, so it's gotten a little steeper. But it's still a lot flatter than it was when we lifted off. So the yield curve is flattening.

All right, now, you have to think what is it that causes this inversion to happen? Well, I told you it could be the long end is doing whatever it's doing. At the short end, the Fed's pushing up rates. So why would you potentially push up rates faster at the short end than the rates are going up at the long end?

One is you're making a mistake. You're being overly aggressive based on the economic data. Remember, I told you about the St. Louis dot plot? It looks like you're being overly aggressive in your rate hike path. And if the long rate doesn't move, you run the risk of tightening too much, too fast, and too short of a horizon. And I would call that a policy mistake if you jack up short rates too much.

Now, it also could be you're having to jack up those rates because it's a calculated risk. As a policymaker, you're sitting there going, man, I know that I run this risk of doing this, but if we don't, inflation might get out of hand. And our main job really we worry about is inflation.

So you may say, look, inflation isn't looking good. We've got to jack up rates now to try to cut this off. It's a calculated risk. It may turn out bad, but that's not a mistake. That's just a calculated risk. You made a call and that was it.

So since inflation doesn't be the concern, that's what I just said, there doesn't seem to be any inflation, the markets don't expect any inflation, my question was, why are we raising rates so fast and so much? The economy doesn't look like it's doing that bad or that overheating that the markets think is going to cause inflation. So maybe, this is kind of the St. Louis view, maybe we should be a little slower in the rate hikes, take a little more of a wait-and-see attitude to see what happens on the long run. If the long end just keeps going up, good, we don't have to worry about this inversion problem.