Investors, for their part, may be signaling dimming confidence in the durability of the economic expansion in the face of rising rates and trade tensions. The gap between 2-year and 10-year yields last month shrank to as little as 18 basis points, and though it has widened back to around 25 basis points amid in an uptick this week in 10-year yields, the curve remains close to its flattest level since 2007. Back then was the last time the market saw a curve inversion, a phenomenon that has been a reliable predictor of recession.
“The market is starting to price in a Fed pause” around mid-2019, said Gene Tannuzzo, a fund manager at Columbia Threadneedle Investments.
2019 Doubts
Bob Parker, a member of Quilvest Wealth Management’s investment committee, predicts economic growth will level off, so the Fed “actually does very little next year.” Jerome Schneider at Pacific Investment Management Co. sees two hikes in 2019, as does Anne Mathias, a strategist at Vanguard.
Part of the reason Camp expects the Fed to stand down next year is to avoid inverting the curve.
New York Fed President John Williams has pushed back on that sentiment.
"We need to make the right decision based on our analysis of where the economy is and where it’s heading in terms of our dual-mandate goals,” he said this month. “If that were to require us to move interest rates up to the point where the yield curve was flat or inverted, that would not be something I would find worrisome on its own."
What it comes down to is that the Fed and markets differ on when rate hikes will start crimping growth. The Fed forecasts policy becoming restrictive by the end of 2019, with the funds rate at 3.1 percent.
What Our Economists Say
“Markets are convinced that there is less work to be done to get interest rates to neutral compared to what policy makers are projecting. This is reflected in terms of both fed funds futures, as well as the relative flatness of the yield curve.”-- Carl Riccadonna, Bloomberg chief U.S. economist