Of all the days to pick for chatting up optimism on inflation’s outlook, this past Friday wasn’t ideal. Nonetheless, two voices from the Fed were on the rubber chicken circuit on March 23, expounding on the benefits that flow from enlightened monetary policy.
Philadelphia Fed President Charles Plosser told a bankers conference that “I anticipate that the yield curve is likely to be flatter, on average, than at comparable points in past business cycles. This is not to say that the yield curve is going to be inverted all the time, but, on average, I believe the curve will be flatter.”
The reason, he opined, was because inflation expectations had become less volatile. “My case for a flatter yield curve is based on two premises: first, inflation and inflation expectations are likely to be lower and more stable, and hence, the inflation premium will be smaller than in the past; and second, inflation and the real economy are likely to be less volatile, so the risk premium will be smaller.”
Although Plosser didn’t think an inverted yield curve would be a permanent fixture, he said he had “confidence in the fact that inflation in the United States is going to stay low and more stable [and that] means there is less reason for long-term rates to be above short-term rates.”