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Pattern of Yield Curve

The following statement was released by the FOMC following its recent meeting on March 21. The Committee, although hopeful for a future of moderate growth with moderating inflation, seems more concerned with the potential inflation threat than with a recession threat
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
Currently, yields-to-maturity on Treasury Securities with maturities of 6months, 1 year, 2 years, 3 years, and 5years, are all below 5.25 %. (They range from 5.00% on the 6 month T-bill, to 4.86% on the 1-year, 4.57% on the 2- year, 4.51% on the 3- year and 4.51% on the 5-year T-Note.

What does this pattern of yields suggest about the attitudes of financial market participants (other than the Fed!) towards inflation risks versus recession risks in the US economy at this time?

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From the pattern of yields it is clear that the short term securities are yielding much higher than the long term securities. This leads to an inverted yield ...

Solution Summary

The solution explains the yield curve and what it indicates.