Question

During the meeting, two analysts are discussing the level of interest rates the economy has experienced recently. One analyst remarks: "We are going through a change in the inflation expectations as we have an inverted yield curve. Surely the investors are expecting lower interest rates and lower inflation in the future." Comment on the analyst's statement, do you agree or disagree, why? Explain fully. Initial response 250-300 words. Thanks!

Answer 1

Yes I do agree with the analyst opinion that there is an environment of inversion in yield curve because the long-term bond yields and have gone down below the short-term bond yield.

These scenarios are known as inverted yield curve and these are a warning signal of an impending recession because if the short term bond start to go over long term bond yield, it means that the bond markets are discounting a low growth decade. federal deserve is also discounting by using the monetary policy through cutting the interest rate in the range of unexpected zero to .25 basis points.

People are expecting that the United State economy is not going to recover in the the the long run from shockwave caused by coronavirus. They are expecting that there are no risk premium for investment into long term bonds because there is a struggling economy ahead as the demand has substantially slowed down. Economies are shut so the economic contagion will spread faster than the health condition.

These are the situations where an analyst should be highly cautious about the growth projection in an economy because when the central bank is itself discounting low growth by cutting the interest rate unexpectedly in the range of zero and issuing statements like it will cut it further into the negative zone if it required the support to stimulate the demand in the economy. one should be highly skeptical on the economy because there is no visible recovery after such disastrous impact from covid-19.

I support the analyst view because these are just the reactive measures by Federal Reserve that will not multiply into any substantial impact of revival of growth but it will instead just act as a temporary resistance as the damage has already been done and the effect will start to show once the economy reopens.