The Yield Curve and Growth Forecasts

Abstract

Fully updated through early 2016, in this case, the protagonist was sifting through the evidence on the predictive content of the yield curve. Did the current steepness of the yield curve mean that a double-dip recession was highly unlikely? Or was the fact that the yield curve had flattened over the past few years suggest a coming slowdown in economic growth? From time to time, the market focused on the slope of the yield curve. What can it tell us? Excerpt UVA-GEM-0106 Rev. Aug. 23, 2018 The Yield Curve and Growth Forecasts As Arturo Rodrigo was riding the early morning Metro-North train from Manhattan to Greenwich, Connecticut, in August 2018, his thoughts turned to the US yield curve. At this point, the US yield curve was upward-sloping because the Federal Reserve (Fed) had kept short rates quite low, and long rates remained historically low at around 3% (Figure1). That said, if one took the difference between the 10-year rate and the three-month rate as a measure of the slope of the yield curve, the current curve had been flattening over the past few years (Figure2). Figure 1. Long and short rates. Note: All figures were created by case writer. Monthly data updated through July 2018. Quarterly data updated through 2018Q2. . . .