5 ms·

I think the slope of the yield curve is determined by the expectations of future fed rate policy.

nickles 5y ago
The front of the yield curve is driven much more by Fed policy than the tail end of the curve. QE was utilized to try and influence longer tenors. Ultimately the term structure is driven by supply and demand, so the composition and size of the Fed's balance sheet has a direct impact on the shape of the curve.
- bubbleRefuge 5y ago
  well, i'd say all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables. The fed can manufacture as much 'funding' of demand as it wants to as it has an unlimited buying power.
  - nickles 5y ago
    > all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables The Fed frames its policy response in terms of the somewhat nebulous natural rate, which implies that there is some exogenous component to rate policy. Additionally, rates have consistently trended downwards for 500 years, well before the invention of central banks [0], supporting the notion that rates are driven by exogenous factors. [0] https://econreview.berkeley.edu/the-long-decline-of-global-interest-rates/ https://econreview.berkeley.edu/the-long-decline-of-global-i...
JumpCrisscross 5y ago
> the slope of the yield curve is determined by the expectations of future fed rate policy Entangled with is a better way to think about it. The Fed strongly influences the rate curve. But the rate curve also influences the Fed. And trading rates isn't just about predicting what the Fed will do (though that's a big piece of it).
- nickles 5y ago
  > But the rate curve also influences the Fed. How much does Fed actually consider the shape of the yield curve? Powell's recent comments indicated they focus on front of curve, as opposed to something like 2s10s. Aren't central banks like ECB/BoJ more attentive to overall shape?
  - JumpCrisscross 5y ago
    > How much does Fed actually consider the shape of the yield curve? Quite a bit. The February MPR cites "yields...across maturities" in the first sentence under financial conditions [1]. (One of the entire novelties of OG QE was the purchase of longer-dated securities.) [1] https://www.federalreserve.gov/monetarypolicy/2022-02-mpr-summary.htm https://www.federalreserve.gov/monetarypolicy/2022-02-mpr-su...

The front of the yield curve is driven much more by Fed policy than the tail end of the curve. QE was utilized to try and influence longer tenors. Ultimately the term structure is driven by supply and demand, so the composition and size of the Fed's balance sheet has a direct impact on the shape of the curve.

bubbleRefuge 5y ago
well, i'd say all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables. The fed can manufacture as much 'funding' of demand as it wants to as it has an unlimited buying power.
- nickles 5y ago
  > all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables The Fed frames its policy response in terms of the somewhat nebulous natural rate, which implies that there is some exogenous component to rate policy. Additionally, rates have consistently trended downwards for 500 years, well before the invention of central banks [0], supporting the notion that rates are driven by exogenous factors. [0] https://econreview.berkeley.edu/the-long-decline-of-global-interest-rates/ https://econreview.berkeley.edu/the-long-decline-of-global-i...

JumpCrisscross 5y ago

> the slope of the yield curve is determined by the expectations of future fed rate policy Entangled with is a better way to think about it. The Fed strongly influences the rate curve. But the rate curve also influences the Fed. And trading rates isn't just about predicting what the Fed will do (though that's a big piece of it).

nickles 5y ago
> But the rate curve also influences the Fed. How much does Fed actually consider the shape of the yield curve? Powell's recent comments indicated they focus on front of curve, as opposed to something like 2s10s. Aren't central banks like ECB/BoJ more attentive to overall shape?
- JumpCrisscross 5y ago
  > How much does Fed actually consider the shape of the yield curve? Quite a bit. The February MPR cites "yields...across maturities" in the first sentence under financial conditions [1]. (One of the entire novelties of OG QE was the purchase of longer-dated securities.) [1] https://www.federalreserve.gov/monetarypolicy/2022-02-mpr-summary.htm https://www.federalreserve.gov/monetarypolicy/2022-02-mpr-su...