Monday 22 August 2005

Interest rates, the yield curve and global imbalances

Barry Ritholtz explains why an inverted yield curve is a bad sign for the economy.

There's been a few comments intimating that, well, maybe an Inverted Yield Curve ain't so bad. I have to disagree in the strongest possible terms. And I have three decidely non-textbook reasons as to why: Cyclical, Liquidity, and Predictive factors.

Thankfully, we're not there yet. And at the current rate of curve flattening, it might take a while to get there.

If The Economist or Brad Setser had their ways though, maybe we won't. They argue -- here and here respectively -- that long rates should go up to redress the imbalance in the global economy.

Or maybe they won't. I discuss why the fall in US interest rates in the face of the Federal Reserve's rate hikes is not inconsistent with the historical pattern in "Markets not moving interest rates to correct global imbalance".

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