short term rate increase means yield curve steepen??? i thought it's the other way
CFAI online practice - Capital Market Expectations - Minglu Li Case Scenario
Based on Taylor’s rule, with an assumption of equal weights applied to forecast versus trend measures, the short-term rate is expected to increase from the current 1.23%, and the yield curve is expected to flatten for longer maturities.
For further insight, Li decides to consult an in-house expert on central banking, Randy Tolliver. Tolliver states the economy is likely in the early expansion phase of the business cycle based on the yield curve and consistent with this phase of the business cycle, monetary policy is becoming less stimulative.
Q. Tolliver’s statement regarding the yield curve is most likely:
- incorrect with regard to the phase of the business cycle.
- incorrect with regard to monetary policy.
A is correct. A is correct. The yield curve is becoming steeper for short-term rates and flattening for longer-term rates which is consistent with the early expansion phase of the business cycle. Also, consistent with the early expansion phase of the business cycle, monetary policy is becoming less stimulative.
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