Trouble with the Curve

Here we are a few hikes and a few holds down the "Exit" ramp and yield curve tourism is swinging into peak season. Having spent many now non-retrievable hours of my life lead timing and lagging various arcs of said curve into and out of the major economic events of my past life; I present a quick ditty for your dining and dancing pleasure.

I have learned that most curve tourism is focused on the easily digestible slope of the T-curve, a canary with little coal mine exit door location prowess. A small sample of the points from the last mistake and today:

2006 March, May, June FF - 4.75, 5.0, 5.25 (rapid eh?#GIK)

Model Equil FF Rate for same months - 3.95, 4.25, 4.47

That's approx 75bps of stringency the way I look at things and of course a year later the Fed was hacking the rate from 4.75 to 4.25 just as quickly - but far too late.

For reference the 5 yr T yield was between 4.95 and 5.10 over the time frame.

and this is quite jocular - http://money.cnn.com/2005/12/27/news/economy/inverted_yield_curve/index.htm

Presently, you could say the FF rate is 1.37 (right down the middle of the corridor) and the model determined equilibrium rate is 1.44.  Conservatively on the bright side of neutral but fold in a fairly aggressive tax cut and an historically low unemployment rate, and it actually tilts toward a tad "easy" still.

Having trouble with the curve? You're looking in the wrong place.

 

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