“I think we’ve got a setting for the federal funds rates which is close to neutral,” he said. “I think it’s a good time to stop, pause, look and see how things are going to progress and be cautious.”
Growth would be between 1.75 per cent and 2 per cent in 2019, which Evans conceded wouldn’t feel good, given growth was 3 per cent in 2018.
But as Yellen explained, this was a slowdown that was completely expected, given the effects of Donald Trump’s tax cuts are starting to fade and global growth has slowed.
“I don’t see a US recession as particularly likely. The US is certainly experiencing a slowing growth, that’s something that was long expected,” she said.
Rosengren’s view was similar to that of Evans. Indeed, the inflation risk he sees is that it doesn’t push high enough.
“I think we actually need to be sure that we are hitting 2 per cent, and that we don’t allow inflation expectations to deteriorate like they have in other countries,” he said.
The first is a financial crisis of some type, usually caused by the unwinding of a financial bubble, such as the tech stock bubble in 2000 and the sub-prime bubble in 2008.
No sign of that, Yellen says.
The second cause is the Fed itself, when it moves to slow down an overheated economy and push down inflation by raising rates. This was highly unlikely in the current environment, where inflation remains so low, Yellen said.
“So we have a Fed that is … overwhelmingly focused on wanting to extend and preserve the expansion.”
Yellen also dismissed concerns about the recent inverting of the yield curve, which has been an accurate predictor of at least the past six global recessions.
She said 10-year rates were a reflection of where the market expected short-term rates to be over that period, plus an additional term premium. However, the term premium has fallen to zero or even turned negative in recent years.
“That means it’s very easy for the yield curve to invert.”
It’s all hard to argue with any of this, but as some in the crowd murmured after Yellen’s speech, there is a “this time it’s different” argument underpinning this.
The world has changed, interests rates will be lower for much longer, central banks are in control of inflation that continues to undershoot forecasts, and the financial system is in much better shape than a decade ago.
Again, all of this makes sense, and Evans and Rosengren clearly remain cautious and watchful. But everyone agrees there will be a recession, and a decade into the global recovery, we are closer to it than not. So where does it come from?
A clue might have been provided by Credit Suisse’s head of global equity strategy, Andrew Garthwaite, who pointed to the tightness in the US labour market, where unemployment is running at 3.8 per cent, well below what’s seen as full employment at 4.4 per cent.
Garthwaite says that when wage growth hits 3.2 per cent, corporate profit margins start to fall. And when profit margins peak, a recession tends to follow. The latest numbers have US wages growing at an annual rate of 3.4 per cent.
Will US wage growth actually get this high? Will the Fed need to react as it did in the past, and slow the economy? Would the high-level of corporate indebtedness in the US exacerbate a recession?
Time will tell. But that would be a very traditional-looking recession in a world that is apparently quite different.
The writer travelled as a guest of Credit Suisse.