Via the excellent Damien Boey at Credit Suisse:
In recent times, we have seen a number of central bankers attempt to jawbone the yield curve steeper, or at least, downplay the significance of flat-to-inverted curves. And all have failed:
- RBA Deputy Governor Debelle suggested that 10-year bond yields are artificially low relative to terminal rate estimates, meaning that the yield curve is artificially flat.
- The ECB floated a “trial balloon” a few weeks ago, suggesting that it could tier sight deposit rates to banks. In other words, officials toyed with the idea that it could waive negative rates on excess reserves for certain banks, helping them to avoid the financial tax. But in last night’s ECB decision, there was no mention of tiering.
- In the Fed minutes, officials generally agreed that patience was in order. But some still thought rate hikes would be appropriate. Some officials revealed their concerns about what an inverted yield curve might mean, while others dismissed inversion as a symptom of artificially negative term risk premia. But regardless of which side of the debate officials found themselves on, most had to explain large and consistent downward revisions to the “dot plots”. Interestingly, the committee referenced significant uncertainties and financial stability risks, without fully explaining the magnitude of their downgrades.
Not helping the Fed was the downside surprise to March core CPI, which went quite far against the grain of leading indicators such as the New York Fed’s underlying inflation gauge, and low unemployment.
