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Money and Financial Markets

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The recent flattening of the yield curve has generated significant controversy. In the past several weeks, the yield curve has inverted, with both two-year and three-month rates rising above 10-year rates. For the past 50 years, the slope of the yield curve has been among the most reliable predictors of future economic growth, with steep curves indicating high growth and flat curves indicating low growth. A scatter plot of real GDP growth against the spread, however, indicates that the yield curve’s predictions show a great deal of dispersion and often miss the mark both on the high and low sides.

Suggested citation: “Money and Financial Markets,” Federal Reserve Bank of Cleveland, Economic Trends, no. 06-02, pp. 06-07, 02.15.2006.

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