As we near our fantastic conclusion to our multiple part series on Interest rates (next post is the last) lets quickly review where we came from.
In our First Post here, we spoke of the basic yield curve and how it logically moves from lower left to higher right high to account for risk …. Recall if a buddy borrows $100 bucks and promises to pay it back tomorrow its a lot less risky than if he promises to pay it back next year… and you would rightly charge him more for the delayed time… The Basic Yield Curve!
In our Second Post here, we spoke of movement of the yield curve … basically a parallel shift upward in better economic times and a parallel shift lower during slower economic times – all other things being equal, which they of course never are…
In our Third Post here, we discussed the players and assets that might sit along the yield curve, attempting to make for a more REAL world example(s)
Today … Well, let’s get to it
Where the Federal Reserve (FOMC) Fiddles on the Yield Curve
For all practical purposes the FOMC/Federal Reserve can completely control the short end of the curve as shown on our graph… Special shout out to the 13 year old tennis player working with the new Apple Pencil (neat subject for another time)- for the updated colored graphs…. yea this is our weekend workings during rain on tennis days..haha
Post GREAT Recession of 2007-2009 the FOMC not only lowered their totally controlled short end of the yield curve – but took the unusual action of using government money to purchase assets of the longer term in order to push longer term rates down as well …
Blue is the normal yield curve – Green is the greatly lowered yield curve we have of late most recently been experiencing ….. Yea the short rate was essentially at ZERO – about what all of our checking accounts have been earning until just recently
Here is the lowering of rates graph:
It is essential that the FOMC eventually normalize the yield curve back to the original lower left upper right as keeping it unnaturally low for too long will likely lead to an overheating of the economy, not to mention over use of risk via leverage/loans …
Here is the Raising or Normalizing Graph we are currently experiencing:
Next up our conclusion, and most importantly it’s predictive behavior over the last six decades….
Have a Great “Rising Rates” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com
We will discuss in great detail soon the interesting, slow tightening compared to all the historical adjustments that have been made before. This time it really is different, at least now, notably slower!
Interest Rates Part FIVE/Final – The FOMC Overshoot, a Recession Predictor – The Inverted Yield Curve
Finally our conclusion to what we have all been waiting for …. The Predictive Value of our discussion …
So we know the FOMC fiddles with rates…
The FOMC Federal Open Market Committee raising the totally controlled short end … recall, they do not totally control the longer end… capital market participants do!
This following Chart is our sizzle….
This is the difference of the 2 year yield and the 10 year yield for about 5-6 decades…
When the 2 year yield is BELOW the 10 year yield the line is plotted above zero … think 1% less 3%, would give you a data point of 2 on this chart….
When the short end of the curve is ABOVE the long end — totally backwards to all logic, the plot on the graph would be BELOW zero… areas which we have circled in red…
Grey area are recessions …. just behind the inversions —
Take a moment and check this chart out…
Here is an easier to see chart from 1999 to present–
They cannot, it is their mandate – keep inflation under control …. raising rates is their main control mechanism.
Also, it is beyond their control as investors actually pile into the long end of the curve dropping it’s rate while the FOMC raises, in anticipation of the next recession…
Creating the Inverted Yield Curve!
In Never go all in or All out fashion, if the curve inverts we do not pack up our things and leave …. BUT caution is definitely advised.
There will be excuses …
Maybe- worth heeding with a track record shown above….
We will keep you posted!
Hope you enjoyed the Series … Quick links – Part 1, Part 2, Part 3, Part 4
Have a Great “Not Inverted Yield Curve” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com
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Posted in Interest Rates, Investing/Financial Planning, Market Comments
Tagged FOMC, Inverted Yield Curve, Yield Curve