‘Neutral’ Rate Can’t Be Known With Certainty, Greenspan Says — and the yield curve isn’t much use either:
Mr. Greenspan reiterated his previously stated doubts about the predictive power of the yield curve. ‘Although the slope of the yield curve remains an important financial indicator, it needs to be interpreted carefully,’ Mr. Greenspan told Mr. Saxton. ‘In particular, a flattening of the yield curve is not a foolproof indicator of future economic weakness. For example, the yield curve narrowed sharply over the period 1992-1994 even as the economy was entering the longest sustained expansion of the postwar period,’ he said.Many factors can affect the slope of the yield curve and these factors ‘do not all have the same implications for future output growth,’ Mr. Greenspan said. ‘In judging the indicator value of any particular change in the slope of the yield curve, it is critical to understand the underlying forces that may be affecting the yield curve at that moment,’ he said.
As the period between 1992 to 1994 illustrates, simply relying on an average statistical relationship estimated over a very long sample ‘can be quite misleading,’ Mr. Greenspan said.