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Economy in Brief

Inverted Treasury Yield Curve Signals Less Liquidity
by Tom Moeller December 27, 2005

At 4.40%, current yields on 10 Year Treasury securities for the most part match the yields on the 2 Year. Fed Chairman Alan Greenspan, and many economists, have indicated that the yield curve's ability to signal changes in economic conditions has slackened as financial markets have broadened and become more complex.

Narrow Money, Broad Money, and the Transmission of Monetary Policy from the Federal Reserve Bank of Richmond is available here.

In the past the move of toward parity, let alone inversion, of the 10-2 Year spread has preceded recessions in the U.S. Without fail it has signaled a marked slowing of liquidity and recently the growth in the monetary base has slowed to 3% from 9% in 2002.

The slowing reflects the effects of higher interest rates on consumers' inclination to borrow and spend as well as banks' inclination to lend.

Certainly, the U.S. economy is "awash in cash." But in a twelve trillion dollar economy such as the U.S., growth is determined at the margin.

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