Yield Curve — an Indicator, not a Cause
Understanding the causal relationship is crucial in using any indicator. Lacy Hunt says that reducing M2 growth will slow the economy, but what does this have to do with the slope of the curve? Meanwhile, there was a lot of economic and media commentary today citing the same arguments I made yesterday. I’ll summarize below, but first review the Hunt argument:
Link: Explaining Yield Curve Inversions.
The Yield Curve briefly inverted — twice — Monday. As we noted yesterday, the deeper and longer a curve remains inverted, the more potentially significant it is. That factoid has been overlooked by many commentators. Following yesterday’s post about …
When Hunt was on CNBC yesterday afternoon, he offered a similar explanation and CNBC’s Steve Liesman could not get it clarified before time ran out. Hunt says it is all part of the demand for money and credit, and that the money supply is growing less rapidly.
Right! We all know that is what the Fed is doing, but what does it have to do with the slope of the curve? Would Hunt like the economy better if the ten-year note rate were 75 bp higher (the effect cited in today’s WSJ). Remember, this discussion is supposed to be about the yield curve, not Fed tightening. Stay focused.
He says that bank profit is diminished and it "crunches the availability of credit that Americans now rely heavily on to keep up their spending habits."
That word "crunch" has a nasty sound, but please note two things. It is exactly the opposite of Barry’s comment that "it’s a buyers market for borrowing." Also, my bank won’t lend to me or to businesses at a rate lower than fed funds. Will yours?
I applaud Barry for seeking out some reasoning on this topic, but I do not think we have discovered our answer yet. I’ll summarize some other views in a new post.