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December 09, 2005

Looking Forward to an Inverted Yield Curve

Macroblog looks at the forthcoming likely inversion of the yield curve:

macroblog: Fed Funds Probabilities: A Peek At March: It's Monday, and that means it's time to report the Carlson-Craig-Melick estimates of what the folks who make their livings in the market for options on federal funds futures think the Federal Open Market Committee is soon to do. At this point, there's not much question about the December meeting... [the market is forecasting a post-meeting Federal Funds rate of 4.25%]

...and scant more for the January meeting: [the market is forecasting a post-meeting Federal Funds rate of 4.25%]

So, we'll have to find what excitement we can in the March meeting. [the market is forecasting a post-meeting Federal Funds rate of a bit more than 4.5%]

That may not actually seem that exciting, but today the 10-year Treasury note closed at 4.4%. If that doesn't change, and the market prediction for the federal funds rate holds true, that could at least be interesting.

Historically, an inverted yield curve--long-term rates lower than short rates--is a sign that the market views a recession likely, and looks forward to the associated steep and rapid rate cuts as the Fed tries to fight unemployment and restore growth.

Posted by DeLong at December 9, 2005 09:47 AM