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      12-06-2018, 12:25 PM   #16
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This is pasted from a service I get at work. Attributed by them to Bloomberg but I’m not sure if it is a quote or paraphrase.

Tuesday’s decline was mostly blamed on the curve inversion between the 3-year and 5-year Treasury yields. This is at the shorter-end or ‘belly’ of the curve and is not the classic recession omen that includes the 2-year vs the 10-year. Bond yields reflect the markets’ perception of future rates of inflation. Higher bond yields in the future imply higher inflation in the future. Inflation is a byproduct of growth, so lower yields in the future imply slower growth. So, an inverted yield curve is a sign of future recession and/or a Fed policy mistake. Notwithstanding QE dynamics, the Fed has more control over the short-end of the yield curve than the long-end. Two-year Treasury yields are heavily influenced by expectations of Fed policy. Most recessions over the past 40-years have been arguably tied to a Fed policy mistake as higher interest rates choke demand. This occurs because policy takes time to work through the economy. Milton Friedman had a way of reducing thoughts into everyday metaphors, explaining the Fed policy mistake as the ‘fool in the shower’…the fool recognizes the shower water is too cold, so turns it higher until it ultimately scalds their skin. Bloomberg 12/6/18
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