Jan Wüstenfeld2022-12-08

Yield curve inversion and monetary policy by the Fed

Once the US yield curve inverts, it takes the FED some time to cave. In the latest history, that reaction window lengthened by quite a bit: Inversion to interest rate top: 02. Jan 89: 21 weeks + rate hikes 31. Jan 00: 43 weeks + rate hikes 05. Jun 06: 72 weeks + rate hike We are currently 22 weeks into the yield inversion and have yet to see the Fed showing signs that they intend to pivot. Considering that year-over-year inflation in the US is still at 7.7%, that likely is still some time away. If history is a guide, the Fed will hike a few more times and then keep the interest rate at that higher level for a prolonged time before lowering it again. Just going by the graph, that time window has lengthened as well. Note: In 2006, it is hard to pinpoint the exact time of the yield curve inversion as it hovered below but close to zero for some time and even went slightly above zero at times. So rather use the weeks to get an idea of the duration and don't take them too literal.