Don't Fed Rate Cuts Contribute to Future Inverted Yield Curves?
I used to know this stuff, but now I don't. Am I wrong in my line of thinking?
Just a thought as I blindly invest in Bond Funds and Futures.
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In the short run, when the fed cuts rates, it’s only at the very short end of the curve, so if they lower the short end, it would immediately help the curve un-invert. If they buy longer term bonds, however, that what would suppress the longer end of the curve and could cause inversion. You also need to consider what the cuts imply to the market; longer term rates will be lower if the fed is cutting because there is no inflation (in which case you would kind of be right in a derivative type way).
But I’m an equity guy, so I really shouldn’t be talking about this stuff.
:)
Inverted yield curves should no longer cause recessions. They did in the past.
But EVERYONE knows that inverted yield curves cause recessions therefore the relationship should be broken....ie the fed is more likely to cut faster to prevent a recession and re-steepen the curve if necessary.
I would assume that we have known for many decades that inversions predict recessions. What is different now to suggest that inversions should no longer predict recessions?
Edit: (Now that I think about it, I believe one issue is different from years ago. The Fed is much more transparent today than it was decades ago))
I could be wrong but I think when people say that inversions predict recessions, they mean substantial inversions such as if the 3 month T-bill yield was higher than that of the 10-Year T Note, like what we are experiencing today.
If the Fed increases short term rates and other rates stay the same or fall, the curve could invert.
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