[lakeweb]

$this->bbcode_second_pass_quote('ElijahJones', '[')url=http://quote.bloomberg.com/apps/news?pid=10000103&sid=aVs0FqFKUQ54&refer=news_index]Oil Rises, Bond Yields Invert : Bloomberg[/url]

Preceding all recent recession is something called an inverted yield curve, this is when short term US bonds have a higher yield then long term bonds. Oil moved up today on supply fears for 2006, the markets moved down on expectations of diminished profits , and the dreaded inverted yield curve reared its ugly head!

Unfortunately I know precious little about this phenomenon, would anyone care to explain why an inverted yield curve would precede a recession?

[Locutionist]

$this->bbcode_second_pass_quote('lakeweb', 'W')hy would the Fed do this? They have been nudging the long end down since Volker started listening to the bond market. More than ever the Fed is stuck between a rock and a hard place. They need the long end to come down, as that is where the borrowing to fuel the economy is coming from. To coax the long end down, they have to take a hawkish stance on inflation. To do that, they have to tighten almost to the point of going overboard. Their stance is now neutral and they could actually drop the short end at the next meeting.

[MD]

$this->bbcode_second_pass_quote('Locutionist', '
')And people wonder why Americans are so ill-informed. You know, if the people with money knowledge would speak English maybe we wouldn't have things like housing bubbles and outrageous consumer debt.

If anyone could translate this I would be grateful. I've been hearing about this inverted curve thing too and haven't been able to make heads or tails of it, because all the information is encrypted in unbreakable financio-code.

Thanks much,
-Paula

[Doly]

Let's see if I understand this: the Fed is running out of options?

[TommyJefferson]

Thanks MD.

[DigitalCubano]

The Fed needs to be hawkish in raising interst rates. They need to establish some degree of monetary leverage. I'm less concerned about the inverted yield curve today then I was 1 or 2 years ago when the Fed had little monetary leverage (i.e. with rates at historical lows), Congress had little fiscal leverage (i.e. huge imbalances) and it looked like the economy might stagnate.

I'm not totally discounting the recessionary portend of an inverted yield curve, but I also think that this time around the underlying circumstances are unique enough to warrant further analysis.