The Morning Jolt

Economy & Business

Should We Worry about the Flattening Yield Curve?

Federal Reserve Board Chairman Jerome Powell speaks at his news conference after the two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, June 13, 2018. (Yuri Gripas/Reuters)

In today’s Jolt, we’ll take a look at the bond markets and what they could mean for continued economic growth; how other countries are handling migration issues of their own; and Chuck Schumer’s resistance to legislative fixes to the family-separation crisis at the border.

It’s Time to Pay Attention to the Bond Markets

“Should we worry about the flattening yield curve?” That’s the question everyone was asking after last week’s Federal Reserve meeting and the subsequent market action. (“Everyone” might be a generous word.) The “yield curve” is simply the difference between treasury-bond yields of different maturities. Take the spread between the two-year yield, which is hovering around 2.5 percent, and the ten-year yield, which is hovering around 2.9 percent. The two–ten curve is the difference between those two numbers, and it currently sits at 37 basis points, or 0.37 percent: flatter than at any point since 2007.

Financial writers and investors often cite the two–ten curve as a relevant piece of information. Because the two-year yield is a rough signal of the bond market’s expectations for monetary policy over the next two years, and the ten-year yield is a rough signal of market expectations for growth and inflation over the next ten years, the difference between the two provides a clue as to how much room the market thinks might be left in an economic expansion.

If the spread between the two treasury yields is large — if the curve is steep — that suggests markets think the central bank has room to raise rates over the next two years without affecting prospects for future economic growth. A flatter curve, such as the one we have today, reflects, in the words of the Wall Street Journal, “investors’ confidence that the Federal Reserve will maintain its current pace of interest-rate increases despite continuing skepticism about the longer-term outlook for economic growth and inflation.” An inverted two–ten curve, meanwhile, is conventionally seen as a harbinger of a recession.

The Jay Powell–led Fed raised rates last week in an altogether expected move. It also included language that suggests it will take a moderately more hawkish stance to monetary policy than it did when the bank was led by Janet Yellen. With the economy ten years into its expansion and the yield curve flattening, should we worry about a recession? Is the business cycle about to turn?

Maybe not. External factors, such as large-scale bond purchases by central banks, pension funds, and foreign countries, can push down long-term interest rates; several commentators have argued that asset purchases by these entities are keeping the spread between short and long rates narrow. But former Bloomberg editor Robert Burgess points out that yield curves already have inverted overseas, and economist David Beckworth observes that the Fed itself seems to be willing to bring about an inverted yield curve. (Its estimate of the long-term federal-funds rate is 2.9 percent; it sees itself raising the short-term rate to 3 percent by 2019.) The yield curve is a wholly artificial metric, and the state of the underlying economy is what really matters. But it’s probably right to sound a note of concern.

Restrictive Migrant Policy Isn’t Just for the U.S.

It’s not just the United States that is flirting with a tougher policy toward migrants seeking to claim asylum. Several European countries are dealing with the issue as well. German chancellor Angela Merkel is facing political turmoil after Horst Seehofer, an interior official from the Christian Social Union party — a coalition partner of her Christian Democratic Union party — claimed the unilateral authority to turn back migrants coming from elsewhere in Europe. Merkel, who has consistently stressed the humanitarian importance of a permissive policy admitting migrants, has rejected the idea and called for an EU meeting to resolve the issue.

Meanwhile, the new interior minister in Italy’s populist coalition government, Matteo Salvini from the right-wing Northern League, made waves last week by denying a ship with more than 600 migrants harbor at an Italian port. The move coincides with the Northern League taking the lead in polls for the first time. (Seehofer reportedly congratulated Salvini over the phone — restrictionist interior ministers stick together.)

Walter Russell Mead makes a necessary point about all of this in the Wall Street Journal. He writes:

Africa’s population, currently estimated at about 1.26 billion, is projected to double by 2050. Many of those additional people will be poor, but smartphones and the internet will keep them informed of the enormous gap between European and African living standards. It’s likely that for the next several decades many countries in Africa (as well as the Middle East and Central Asia) will remain underdeveloped, torn by civil and religious violence, and producing large numbers of desperate young men.

Europe simply cannot deal with these pressures unless it develops much stronger tools to control migration. Today, such ideas remain unthinkable among respectable European politicians, but that equilibrium is fragile. Almost two-thirds of Europeans cite either migration (38 percent) or terrorism (29 percent) as one of the European Union’s two most important problems, according to the most recent Eurobarometer poll. Addressing climate change and strengthening Europe’s place in the world, causes much closer to the heart of the European establishment, were each cited as important by only 11 percent of those surveyed.

This issue is not going away. It is likely to intensify over the coming decades as hotter temperatures and droughts in sub-Saharan Africa and across the Middle East propel more migrants to Europe. As these domestic disputes and the fierce debate they have provoked in the European press reveal, the continent still has not figured out what its approach to migrants ought to be.

One major theme of Christopher Caldwell’s Reflections on the Revolution in Europe is that Europe came about its current stance on immigration without a proper debate. The postwar necessity for migrant labor quickly elided into a lasting ideology of large-scale immigration whose justifications shifted depending on the interlocutor. Such an approach will not suffice; its political downsides are becoming clear as the “responsible” architects of Europe’s permissive immigration policy yield to populists. If these responsible actors want to prevent demagogues from exploiting the immigration issue, then they need to respond to the concerns of their voters with something beyond vague bromides about the value of inclusion.

Yes, more family separation

The front pages of the U.S.’s newspapers remain focused on family separation. Last night, Senate minority leader Chuck Schumer announced that he opposes congressional action to end the practice because, “when the president can do it with his own pen, it makes no sense.” This rationale seems even more ridiculous when one considers that Republicans have drafted narrowly tailored legislation that would address the family-separation issue head-on. The administration, rather grotesquely, said it would block any legislation that did not also resolve surrounding immigration-policy questions. But if Democrats and Republicans were to agree on a bill, they could form a supermajority and render these negotiating tactics moot. I want to believe that our congressional leaders would put the best interests of the country before their own political interests and find a quick resolution to this problem. But Democrats might want to use this issue against Republicans for the midterm elections. There’s a reason Americans are deeply cynical when it comes to the legislative branch, and this is it.

ADDENDA: I’d like to plug “Taiwan’s Challenge,” my first print article for National Review, which appears in the June 25, 2018, issue. I’d like to mention that the NBA Draft is tomorrow, and Friday’s edition of the Jolt will feature plenty of words breaking down the fallout from that glorious occasion. And I’d like to stipulate that the Beach Boys’ album Sunflower is superior to the Beatles’ Abbey Road. See you all tomorrow.


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