What's the Fed up to when Yield Curves "De-Invert"?

By: Paul Kasriel | Wed, Dec 6, 2006
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The chart below shows a history of the spread between the yield on the 10-year Treasury security and the fed funds rate starting in 1965. Also plotted in the chart is the level of the fed funds rate. Notice that when the spread moves from a negative value to a positive value, that is, when the yield curve "de-inverts," the fed funds rate has begun to fall. If history is any guide, then, don't look for the negative spread between the Treasury 10-year and fed funds to turn positive until the FOMC begins cutting the fed funds rate. Today's ADP private nonfarm payroll forecast notwithstanding, do look for the FOMC to begin cutting the fed funds rate no later than March 21, when it will become obvious even to Greg Ip's Fed sources that economic growth is at stall speed and inflation is the last war.

Chart 1
10-Yr. Treasury - Fed Funds Rate Spread vs. Fed Funds Rate



Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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