Flatter yield is something to pay attention to, but not really a worry. The whole later 1990s several years bond yield curve was quite flat. Inverted yield curve is the real worry. Even in 2006 when inverted curve happened, economy didn’t get into recession until 2 years later. Both year 2000 and 2006 there were bubbles in economy – Nasdaq in 2000 and housing in 2006, so the Fed had no choice but jacking up the short term interest which caused the inversion. This time there is no obvious bubble at this stage and world economy is growing healthily, but not super strong, so I doubt Fed will artificially create inverted curve. Some Fed official has publicly said to vote against increasing short term rate if facing consequence of inverted curve.
Right now the steroid juicing effect from Tax cut is at the most potent stage. As time goes, the juice will wane down, probably later this year and next a couple of years. The market is very hawkish now and even the Fed gave hawkish guidance, but that is a strategy they play. It is always easy to switch from hawkish stance to dovish, but hard for the other way switch. In 2019 when Tax cut effect dies down, any extra rate hike has to be very careful and face a lot of resistance even inside the fed. We may see some dovish surprise next a few years.
