Tim Duy, Columnist

The Unintended Consequences of a Flatter Yield Curve

But a leveling does suggest the economy remains mired in a low rate environment.

November 20, 2017 at 10:00 AM EST

Tim Duy is a professor of practice and senior director of the Oregon Economic Forum at the University of Oregon and the author of Tim Duy's Fed Watch.

Flattening.
Source: Digital Light Source/UIG via Getty Images

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It was supposed to be easy. When the Federal Reserve started hiking the federal funds rate, longer-term interest rates would rise. After all, they were at very low levels, restrained by a low-term premium. The “Greenspan conundrum” of the past two cycles, when long rates failed to respond in line with higher short rates, couldn’t happen a third time in such circumstances.

But it didn’t work out that way. Short rates continue to gain on firming expectations of tighter Fed policy while long-rates stubbornly track sideways. As a result, the yield curve continues to flatten, raising fears of recession. What’s going on? Are the fears valid?

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