What’s the Fed Up To? Rates, Inversions, and Quantitative Tightening

Apr 08

The U.S. Treasury yield curve inverted last week. An inversion is when the shorter-term yield in a pair of U.S. Treasury maturities is higher than the longer-term yield, reversing or inverting the normal relationship. The significance of a yield curve inversion is that inversions have a history of predicting recessions.

The yield curve inverts because investors believe that the economy will slow in the future. The Fed attempts to control inflation by increasing interest rates, which makes business investment more expensive. Markets appear to think that the Fed will overshoot with rate increases, which will stifle rather than slow economic growth. The Fed will then have to begin decreasing rates again.

Markets are reacting to two things. First, barely a week after the FOMC met and increased rates by 25 basis points, Fed Chairman Powell indicated that 50 basis point increases would likely be necessary. Speaking at a National Association for Business... ...