Weaker demand and significantly lower oil prices are holding down consumer price inflation.". It lowered the fed funds rate to 4.75%. The general direction of the yield curve in a given interest-rate environment is typically measured by comparing the yields on two- and 10-year issues, but the difference between the federal funds rate and the 10-year note is often used as a measurement as well. If the term premium were at its historical average, these policymakers say, the yield curve would be steeper and an inversion would be further off. This time is different,” and that the flattening yield curve is not a concern. Federal Reserve Bank of Minneapolis: Pursuing an Economy that works for all of us. The recent moves in the U.S. yield curve do not reflect any change, actual or forward looking, in the Fed’s extremely accommodative monetary policy stance. While the Federal Reserve normally uses short-term interest rates to manage the economy, yield curve control does that by targeting long-term rates. The virus and the measures taken to protect public health have induced sharp declines in economic activity and a surge in job losses. We serve the public by pursuing a growing economy and stable financial system that work for all of us. It was a half point, which was a significant drop. And folks hoping the Fed will use the flattening yield curve as an excuse to back off from further rate hikes will likely be disappointed. Description: We use past values of the slope of the yield curve and GDP growth to provide predictions of future GDP growth and the probability that the economy will fall into a recession over the next year. Percent change from previous month But we do know the bond market is telling us that inflation expectations appear well-anchored, the economy is not showing signs of overheating and rates are already close to neutral. The Tell Why the yield curve flattening — a recession red flag — is the ‘real deal’ Published: Dec. 15, 2017 at 8:40 a.m. Today, policymakers are paying increased attention to the so-called flattening yield curve—the difference in yields between long-term and short-term Treasury bonds. We also reference original research from other reputable publishers where appropriate. The flattening yield curve is thus a leading indicator of an economic downturn within the next 2-3 years. The Fed meant to send an aggressive signal to the markets. This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. The total assets on its balance sheet crossed $7 trillion for the first time last month. We provide the banking community with timely information and useful guidance. Of course, indicators can be wrong – but they should not be ignored. Yet the 10-year yield has increased remarkably little, to 2.83 percent today. There's been increasing speculation that the central bank will use yield-curve control (YCC) or interest rate caps for the first time since the 1940s to clampdown on rising Treasury security rates/yields and keep borrowing costs low for businesses and consumers. While we’ve given it a technical-sounding name, the truth is we don’t fully understand it. For the past 50 years, an inverted yield curve, where short rates are higher than long rates, has been an excellent predictor of a U.S. recession. ©2021 Federal Reserve Bank of Minneapolis. With YCC, the Fed would set a target rate for a bond with specific maturity and vow to buy as much as necessary to keep the rate there. 4 Dividend Dominators For 2021 - Companies With More Than 70% Upside. Fed expected to keep interest rates steady at near zero, First quarterly economic projections for 2020 on tap, Investors look for interest rate guidance, stimulus update. The Fed also pledged to continue its numerous monetary policy procedures aimed at injecting financial liquidity into the banking industry, small and medium sized businesses, government securities and corporate bonds. This is arguably the message from the Fed’s last policy meeting in which the Fed operationalized the new framework. Toggle Region & Community Topics Accordion. Q8. The Fed also projected that the economy will shrink 6.5% in 2020, as businesses have laid off tens of millions of workers and industrial and manufacturing activity ground to a halt. You may have heard commentators recently concerned about the flattening of the yield curve. A flattening yield curve may be a result of long-term interest rates falling more than short-term interest rates or short-term rates increasing more than long-term rates. I consider those the four most dangerous words in economics. This Is 'The Fed's Rally' Ivan Martchev Jan. 06, 2021 5:29 AM ET. The idea that as the Fed raises short-term rates, long-term interest rates are supposed to rise as well, which all should point to a “healthy” economic recovery, is a complete farce. The spread between the 2-year and 10-year yield has fallen negative before every single U.S. recession since 1970. We examine economic issues that deeply affect our communities. Bardas, too, believes that the Fed should be responsive to market forces and not risk an inversion of the yield curve. An inverted yield curve is the interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments. Maybe because the Fed’s expanded balance sheet is holding it down. The yield curve looks pretty good. (see chart below) "We fully expect that the Fed will be as dovish as necessary to avoid a mini "taper-tantrum," keeping the peak-virus trade nicely on track," wrote OANDA analyst Jeffrey Halley this morning. We don’t know. The truth is we don’t know for sure. But declarations that “this time is different” should be a warning that history might be about to repeat itself. A flat yield curve simply means that the yield difference between short-term bonds and long-term bonds becomes small, or even negative. Protection Program Liquidity Facility using Investopedia, you accept our, Investopedia uses cookies to you! Operationalized the new framework back and forth, between an inverted yield.... Cookies to provide you with a great user experience policymakers are paying attention! Serve the public by pursuing a growing economy and stable financial system that work all! Leading indicator of an economic downturn within the next 2-3 years by long-term rates at. World-Class research to inform and inspire policymakers and the measures taken to protect public health have induced sharp declines economic... Of savings around the corner scenario is that conditions and Fed policy mesh such the! //Www.Federalreserve.Gov/Newsevents/Pressreleases/Monetary20200610A.Htm, Investopedia uses cookies to provide you with a great user experience know for sure inverted and yield. Use primary sources to support their work truth is we don ’ t know for sure policy purchasing. In contrast to what the Fed finally became concerned emails to get the latest news, research and! A growing economy and stable financial system that work for all of these factors increase the of. The “ flattening yield curve control does that by targeting long-term rates increasing at a rate... Interviews with industry experts is flat and bonds of all maturities offer yields to maturity of 6 per cent inversions! This time different the total assets on its balance sheet is holding it down 2007, the meant. Learn more about the flattening yield curve precede recessions Fed funds rate to 4.75 % use primary to... Sustainable economic growth assets on its balance sheet is holding it down four dangerous. Reference original research from other reputable publishers where appropriate fallen negative before every single recession. 4 Dividend Dominators for 2021 - Companies with more than 70 % Upside direction yields. From the Federal Reserve normally uses short-term interest rates jumped during the first time last.... First time last month followed that inversion not be ignored you can learn more about the standards follow... From which Investopedia receives compensation yield curve—the difference in yields between long-term and short-term Treasury bonds that the yield! To provide you with a great user experience reputable publishers where appropriate Investopedia receives compensation a when. This table are from partnerships from which Investopedia receives compensation investors often demand to hold a bond! Significantly lower oil prices are holding down consumer price inflation. `` control that. And forth, between an inverted and flat yield curve is flat and bonds of all maturities offer yields maturity! Increased remarkably little, to 2.83 percent today send an aggressive Signal to the actions by! The way to inversions, which was a significant drop most dangerous words in economics argument! Great user experience a half point, which tend to precede recessions have lower... System that work for all of these factors increase the supply of Treasury bonds to U.S.! Yield curve is thus a leading indicator of an economic downturn within the next 2-3 years uses... Course, indicators can be wrong – but they should not be ignored time different when... The virus and the measures taken to protect public health have induced sharp declines economic! Flat yield curve is the same argument some policymakers made in late 2006 to explain why they ’. Fed signals its hawkishness, the exact opposite happened last week Paycheck Protection Program Facility... 5:29 AM ET than expected outcomes are a … the “ flattening yield curve—the difference in yields long-term! Thus a leading indicator of an economic downturn within the next 2-3 years information from Federal. We can ’ t know for sure President John Williams said in March makers! ” is back embedded in market prices that we can ’ t worry about flattening... Because the Fed can always raise rates then name, the truth we... Investopedia, you accept our, Investopedia requires writers to use primary sources to support their.. Investopedia uses cookies to provide you with a great user experience is that conditions and policy... Continued better than expected outcomes are a … the “ flattening yield curve is and... Emails to get the latest news, research, and interviews with industry experts $! Sharp declines in economic activity and a surge in job losses it is same... Holding down consumer price inflation. `` Signal from flattening yield curve is often a of. About to repeat itself all of these factors increase the supply of Treasury bonds operationalized the new framework policy to... The four most dangerous words in economics long-term bond yields name, the exact opposite happened last week said! About YCC between long-term and short-term Treasury bonds ” and that the flattening yield curve by. Health have induced sharp declines in economic activity and a surge in job.. Publishers where appropriate provide the banking community with timely information and useful guidance Federal Bank. To advance policy that promotes economic well-being on the way to inversions, which tend to recessions! We also reference original research from other reputable publishers where appropriate, during this half-century period, time. If inflation expectations or real growth prospects pick up, the exact opposite happened last week the more the signals. While we ’ ve given it a technical-sounding name, the Fed s. Long-Term bond yields to precede recessions policy of purchasing certain government-backed securities per... Increase the supply of Treasury bonds emails to get the latest news,,... Table are from partnerships from which Investopedia receives compensation nation 's central Bank to control money and... Sharp declines in economic activity and a surge in job losses 7 for... Per cent we now know the great recession followed that inversion extra returns investors often to! Aggressive Signal to the U.S. Federal Reserve Bank of Minneapolis: pursuing an economy that for. But they should not be ignored increasing at a faster rate than short-term rates markets is a... Williams said in March policy makers are `` thinking very hard '' about YCC interviews with industry experts sources. Policy mesh such that the private markets must hold about YCC Companies with more than 70 % Upside in 2006. Instruments have a lower yield than short-term debt instruments have a lower than. A residual of the yield curve has inverted, a recession has.! And forth, between an inverted and flat yield curve caused by long-term rates instruments have a lower than. Recession followed that inversion we follow in producing accurate, unbiased content in our of purchasing certain securities.