The Flat Yield Curve

Actually, the yield isn’t even flat anymore, it’s a bowl. The yield on the five-year note is lower than both the 90-day bill and the 10-year bond.
The Federal Reserve came close to flattening out the yield curve earlier this year at about 4.5%. Then the long-end run away from the central bank. But over the summer, long-term yields started to head back down and they crossed the short-term yields on the way.
I still wouldn’t mind seeing another 25 or 50 basis points from the Fed. I think we’ve forgotten how high inflation-adjusted short-term rates can go. I think the basic rule should be to keep interest rates about 3% above the core rate of inflation during an expansion. And during a recession, real rates should be close to zero as possible without going negative.

Posted by Eddy Elfenbein on September 19th, 2006 at 11:31 am

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