Tuesday, June 23, 2009
As this chart shows, the Treasury yield curve is extremely steep. Steep curves are almost always a sign of easy money, and they traditionally signal recovery or the onset of recovery. That the curve today is so steep, at a time when short-term rates are at generational lows, the dollar is generally weak, gold is over $900/oz., credit and swap spreads are narrowing and commodity prices are rising across the board, is a clear sign that the Fed should be thinking very seriously about tightening monetary policy. If they don't then inflation pressures are going to be rising.
This sounds like heresy, I know, since economic pessimism is still in abundant supply these days. No one believes the green shoots, no one believes the banks are lending, many argue that the money supply hasn't increased enough, the unemployment rate is still rising, etc. But the things I mention above (e.g., the slope of the yield curve, gold, the value of the dollar, commodity prices, swap spreads) are good leading indicators of what is going to show up in the economy and the headlines in the months to come. If the Fed wants to do a good job they need to be forward-looking, not driving by looking in the rear-view mirror.
Posted by Scott Grannis at 10:33 AM