There are also concerns in the market, and within the Fed, about the flattening yield curve. The curve, in the case of the gap between the 2-year yield and 10-year yield, is now at a very flat 22 basis points. The worry is a flat curve leads to an inverted curve, where the short end yield could rise above the 10-year. Inverted curves are viewed as reliable recession warnings.
Sharif said the minutes of the July meeting showed that some Fed officials are concerned about the flattening curve but others are not. The curve flattens, as the short end of the curve rises, reflecting Fed rate hiking, while the longer end is held down by other factors, including low global rates and concerns about risks like Turkey’s economic crisis and emerging market weakness.
“We know there’s a bunch of people who are saying this time it’s different,” said Sharif. “Yet they spent a good chunk of that [July] meeting listening to a staff presentation on whether their tool kit is sufficient if there’s another downturn. They’re kind of prepping their tool kit.”
Sharif said he expects the markets to start pricing in the Fed’s hikes for next year, once it raises in December.
“If they go in September, and they go again in December, instead of just [pricing in] March we’ll have March and June as well. We’ll start believing the Fed once they start doing it,” he said. “To me, if Powell makes news tomorrow, I’d be very surprised.”
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