The dramatic flattening of the Treasury yield curve during the past two months should send a warning sign to Federal Reserve (Fed) policymakers that a change is needed in their approach to fighting inflation. Yields on 3-month Treasury bills have risen more than 150 basis points (bps) during that time period, while 10-year Treasury yields barely budged — hovering near 3%.
If the Fed continues down the path of super-sized rate hikes while sticking with its current plan for balance sheet reduction, the entire yield curve will likely be pushed into inversion — increasing the odds of a recession. After another round of disappointing inflation readings, an additional 75-basis-point rate hike is a near-certainty at next week’s Fed meeting. However, the Fed is likely to at least consider a greater emphasis on asset sales to tighten policy moving ahead.
This week’s economic calendar is a relatively light one, highlighted by housing data on Tuesday and Wednesday, followed by Thursday’s Philadelphia Fed Business Outlook. Decisions on Thursday by the European Central Bank and Bank of Japan will also be in focus for investors, as high inflation is a mounting problem across the globe.
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