Treasury Yield Curve And The Fed Rate Decision: Is The Federal Reserve Caught Between A Rock And A Hard Place?

By | September 25, 2018

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The conventional wisdom among fixed income market seers is that the Federal Reserve will continue to tighten credit, raising the fed funds target rate multiple more times before they are finished!

This is due to a stronger economy, inflation under control and unemployment at low levels suggesting full employment. This scenario presents the Fed with a confluence of factors seeming to indicate that there is only one decision they can come to.

Raise the fed funds rate as per its dual mandate.

At the same time, the Treasury yield curve is flat, with the current spread between the 2-year and 10-year maturities 26 bps and the 2-year and 30-year maturities 40 bps.

Tomorrow the Federal Reserve will announce its decision on whether or not to raise the target for the fed funds rate but, will concern over an inverted yield curve and the signal that might send to the markets have them hesitate to make such a move?

An Inverted Yield Curve: What It Is And Does It Really Matter?

An inverted yield curve, simply, is when short-term interest rates are higher than longer-term rates. The traditional shape of the yield curve is when short-term yields are lower than longer-term yields.

Historically an inversion of the curve is an indicator that a recession could be on the horizon. In other words, an inverted yield curve does not cause a recession, but one may be around the corner.

That said, given the dual mandate of the Federal Reserve, it stands to reason that they will continue to raise rates.

If and when the yield curve inverts, will it merely be an anomaly in the context of a continued strong and growing economy or an indicator of storm clouds on the economic horizon?

Stay tuned!

Thoughts or questions? Just let us know!

Michael Haltman, President
Hallmark Abstract Service
Phone: (646) 741-6101

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