Cutler Blog

Will the Fed Flatten?

November 03, 2016

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The Fed has been hearing from regional Fed presidents that they need to tighten. However, one of the great problems in today’s environment is that if the Fed tightens, then the yield curve will most likely flatten. That is not good for depository institutions. They like steep curves. So what’s a Fed to do? They can “reverse” Operation Twist to pressure the yield curve steeper – you know, like the Japanese. Or, and why not, introduce into our vocabulary, once again, the word inflation. Long bonds hate inflation.

The Fed will typically try to impose its will on the curve through jawboning. So far so good. The curve has been pressing a bit steeper on all of this inflation talk. See below for a history of the 2yr/10yr spread represented by the white line, and the Fed Funds rate represented by the yellow line. You will see that historically when the Fed begins to raise rates the curve flattens. That, in today’s environment is unacceptable. They are sneaky!

 

 

Disclaimer

These blogs are provided for informational purposes only and represent Cutler Investment Group’s (“Cutler”) views as of the date of posting. Such views are subject to change at any point without notice. The information in the blogs should not be considered investment advice or a recommendation to buy or sell any types of securities.   Some of the information provided has been obtained from third party sources believed to be reliable but such information is not guaranteed.  Cutler has not taken into account the investment objectives, financial situation or particular needs of any individual investor. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor's financial situation or risk tolerance.  Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.
 

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