Dallas: Federal Reserve vice-chairman Richard Clarida said that when rates on shorter-dated bonds move above rates on longer-dated bonds, it can be a signal that an economic slowdown is coming.

“Historically in the US, inverted yield curves are actually pretty rare — they aren’t black swans, but they don’t happen a lot, and when they do happen that is typically a signal that the economy is either slowing sharply or could even go into a recession,” Clarida said Monday at an event at the Dallas Fed.

Clarida drew a distinction between flat and actually inverted curves.

“Right now the yield curve in the US is not inverted” but “it is getting flatter,” Clarida said. He noted that the Fed pays a lot of attention to whether the curve is flattening because of a fall in inflation expectations. And he said that monitoring the curve is complicated by the fact that US markets are impacted by global demand for safe assets. “What happens in Europe and Asia can have an impact on our Treasury market, too.”

Clarida, speaking during a question-and-answer session with Dallas Fed President Robert Kaplan, repeatedly said the US economy is in a good place now. Still, he pointed to a number of global risks, including slowing growth in Europe.

US officials can’t lose sight of the fact that ‘much of the rest of the world, especially in Europe and in Japan, is really still not away from crisis monetary policy and crisis mode,” he said. “Obviously, on balance, that makes the global economy more fragile than if they were further along.”

The vice-chairman also reiterated the Fed’s decision last month to approach any future rate changes patiently.

“The US economy is operating very close to, if not through, some estimates of full employment, price inflation is very close to our desired levels,” Clarida said. “We think that with the economy where it is today, with inflation pressures muted and with a lot of normalisation already accomplished, that we can afford to be patient and be data-dependent.”