The yield curve continues to flatten ahead of the Fed's September meeting
With the Fed set to hike rates two more times this year, it's only a matter of months now before the 2s-10s spread heads towards zero. The last two times that happened, it was a precursor to a recession. This time around the Fed has been arguing against such a reasoning as they seek to also continue hiking rates into 2019.
The issue here is that even if it may not be the "be all, end all" signal of a recession, you can bet that the Fed will be worried. And we've even seen Atlanta Fed president Bostic express some of those concerns yesterday here. That said, the flattening of the yield curve may very well create a rethink and a slowdown in the Fed's tightening cycle when the time comes.
In the end, the Fed could be right and that this isn't an imminent signal that a recession is coming. But the real fear is that it could be a sell-fulfilling prophecy and that is something they may not be able to do anything about.
So, forget about Trump. The Fed prides itself on independence and they won't be swayed by his jabs at them overnight. But a flat yield curve, now that could be something that packs a punch instead.
