US | The yield curve has shifted further down and is headed to fully invert soon

Summary

The Fed is attempting to reverse this downshift saying it is set to keep policy “sufficiently restrictive for some time”. Next week, the FOMC will agree to slow rate hikes again and will discuss how much further to go.

Key points

• Key points:
• The attempt to reverse the downward shift in the yield curve is becoming more challenging as evidence of a gloomy outlook for economic activity and a more benign one for inflation continues to mount.
• The debate surrounding a likely recession this year is focused on its possible severity, not on its probability of occurrence as both the 10y-2y and 10y-3m Treasury yield spreads have hit four-decade lows.
• Markets' expectation of the terminal rate hasn't changed much, but they’re pricing in an earlier easing of policy in late 2023, and a much faster one than signaled by Fed projections in 2024.
• Broad financial conditions indices kept easing. Dec’s FOMC minutes revealed members remain concerned that “an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the [Fed’s] reaction function, would complicate the [Fed’s] effort to restore price stability”.

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