The shape of the Treasury yield curve evolves as the Federal Reserve adjusts monetary policy throughout an economic cycle. Place the following yield curve stages in chronological order, beginning with a normal economic expansion and ending with the central bank's policy response to a subsequent economic downturn.
- 1Normal Yield Curve: Long-term yields are higher than short-term yields, reflecting standard compensation for holding longer maturities during economic expansion.
- 2Flattening Yield Curve: The yield spread narrows as short-term interest rates increase faster than long-term yields in response to initial Federal Reserve rate hikes.
- 3Inverted Yield Curve: Short-term yields surpass long-term yields as restrictive short-term rates combine with investor expectations of a future economic slowdown.
- 4Normalizing (Steepening) Yield Curve: Short-term yields drop rapidly as the Federal Reserve slashes rates to stimulate the slowing economy, re-establishing a positive slope.
Cevap
The correct chronological progression begins with a Normal Yield Curve during expansion, moves to a Flattening Yield Curve as short rates rise, transitions to an Inverted Yield Curve under peak tightening, and ends with a Normalizing (Steepening) Yield Curve as the central bank slashes rates during a downturn.
During an economic expansion, a normal yield curve reflects positive yield spreads across longer maturities. As the Federal Reserve tightens monetary policy to curb inflation, short-term yields rise faster than long-term yields, flattening the curve. Continued tightening drives short-term rates above long-term rates, resulting in an inverted yield curve. When economic activity contracts, the Federal Reserve lowers short-term rates, causing short-term yields to plummet and normalizing the yield curve back to an upward slope.
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Yield Curve Dynamics across Monetary Policy Cycles
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