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Berk's Blog

Real Yields versus Yield Curve Slope

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The investment world is fixated on China trade wars a.k.a. tariffs, rapidly declining interest rates, sky-high stock prices, inverted yield curves, negative interest rates and looming recessions around the world.

No one can predict the future and investment climate uncertainty seems to have reached a high. The market gave the Federal Reserve a strong message that it ought to lower the Fed Funds Rate. The Fed received that message and signaled that a rate cut could happen in July.

According to Scott Grannis on his Calafia Pundit Blog, this is the best chart to illustrate the impact of monetary policy on the economy. “It combines the real Fed funds rate (blue line: the true “cost” of borrowing money) with the slope of the Treasury yield curve (red line: the difference between 1- and 10-yr Treasury yields). When the yield curve is flat or inverted and real interest rates are high, a recession has always followed. Today the yield curve is flat, but real interest rates are still relatively low. The current situation is problematic, but a recession is not imminent or foreordained. (My emphasis).”