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Interest Rates

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Do interest rates tell us if inflation—or expected inflation—has increased? One approach is to look at the slope of the yield curve, noting that higher expected inflation will increase long-term interest rates. There has not been much movement in either short- or long-term rates since last month, though both have moved higher since last year, short rates more so. This is confirmed by the 10-year, 3-month spread, now down to 37 basis points from 75 bp at the same time last year. While consistent with a story about inflation fears increasing long rates, leading to a Federal Reserve response that increases short rates, the term spread is an unreliable predictor of future inflation, confounding as it does a variety of real factors.

Suggested citation: "Interest Rates," Federal Reserve Bank of Cleveland, Economic Trends, no. 00-05, pp. 06, 05.01.2000.

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