Shifting the Curve | August 24, 2018

Last week marked a major shift in Federal Reserve Board (FRB) language–a  shift that could impact the yield curve and extend this bull market!

Week’s News

Last week Wednesday marked the passing of a major milestone. Until that time, the bull market from 1990 to 2000 was the longest bull market in history. Wednesday, this bull market took that title away from the ‘Tech Bubble’ of the Nineties.

The FRB Chair, Jerome Powell, on Friday, spoke at the annual Central Bank meeting in Jackson Hole. While re-enforcing a September hike, he conceded that demand late in the year appears a little more uncertain and may cause a pause in the rate hike process.

What it Means

This was music to our ears! The flattening yield curve, which should flatten more before expanding some, has become an increasing cause for concern. As discussed in past Market Thoughts, an inverted yield curve (where 2-year Treasuries pay more than 10-year Treasuries) is often a precursor to recession.

How They Fix the Curve

When the curve is flat, it does not take much a of shock to the economy for the yield curve to become inverted. By pausing on rate hikes, they give time for international central banks to eliminate accommodative policy and increase their interest rates–doing so will allow our 10-year rate to drift up and steepen the curve. The other way is for the FRB to start unloading more of the balance sheet–doing so will increase supply on the longer end of the curve, and as a result increase the 10-year rate.

 

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