Friday, May 26, 2006

Yields throw the Fed a curve

CNN reports:
Three of the scariest words in economics used to be "inverted yield curve."

The condition, which occurs when long-term interest rates are lower than short-term rates in the Treasury bond market, was once seen as a pretty clear signal of a recession ahead.

And while that's changed - many economists now say an inversion is more a sign of a slowing economy than a coming recession - the action in the bond market Wednesday morning had some experts saying the Federal Reserve may finally be forced to pause in its rate-hiking campaign so as not to upset financial markets.

"It's not among the top five things they're reading, but I don't think they're ignoring it totally," said Tom Schlesinger, executive director Financial Markets Center, a research firm that follows the Fed closely.

The inversion early Wednesday was different than the inversion that occurred late last year and early this year, when the 10-year Treasury yield fell below the yield on shorter-term Treasury securities.

Wednesday's inversion came as the 10-year yield fell briefly below the fed funds rate, the Fed's short-term rate target, currently 5 percent. It was the first time that's happened since April 2001, the last time the country was in a recession.
We doubt a fear of an inverted yield curve is going to stop higher rates from the long end of the yield curve.