Yield Curve Flattens Into "Danger Zone"
At the Dallas News, a roundtable discussion with Wall Street analysts and Richard Fisher, president of the Federal Reserve Bank of Dallas, turned to the housing market. "The one factor that could throw a wrench into any plans to pause (rate increases)is housing. Home price increases may not be reflected in the CPI data, but experts say there's no doubt they play a big role in the Fed's decision-making process."
Andrew Tilton, a Goldman Sachs economist said, "The mechanism to cool housing is long-term rates. The trick from the Fed's perspective is how to cool things off without causing a crash and a significant slowdown in consumer spending."
"Mr. Fisher concurred that housing was a priority at the central bank, something his fellow Fed governors and Alan Greenspan have echoed in recent speeches. 'We are monitoring it,' he said."
Sheryl King, economist at Merrill Lynch "refers to the shrinking gap between the yield on the 2-year and 10-year Treasury. After being around 90 basis points, or hundredths of a percentage point, the spread had narrowed by the end of last week to 51 basis points. Fifty basis points has traditionally been accepted as the 'danger zone' among economists."
"'The bond yield curve has flattened significantly,' Ms. King said. 'That tells us the Fed will not be able to engineer a soft landing.'"