By any measure real rates have steadily risen as both actual and expected inflation have trended lower and nominal rates have trended higher. Without any change, policy would be unnecessarily tightening. Rates cuts and QT would together have a steepening impact on the curve and help address some concerns in the banking sector, whose margins have been squeezed by curve inversion. The Japanese experience with a persistently flat or inverted curve was poor growth and potential financial stability concerns as some investors reached for risk. This in part motivated the BOJ’s 2016 foray into YCC, which steepened the curve by raising 10 year JGB yields above the deposit rate. The financial system needs an upward-sloping curve to work well, so the Fed may be nudging it in that direction.
- Date Posted:
- August 18, 2023
A careful reading of the present situation does not support the view that China's growth is now gripped by a severe cyclical downward spiral that will persist for several years. Falling retail prices could lead households to postpone consumption on the expectation that goods would become cheaper tomorrow. That would reduce consumption and economic growth. But the widely noted 0.3% decline in consumer prices in July 2023 compared with a year ago was mostly due to elevated food prices in the same period of 2022. Stripping out volatile prices of food and energy, core consumer prices in July rose by 0.8%, up from the 0.4% increase in June. It may be premature to raise the specter of deflation based on one month of data.