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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:

  1. correct.
  2. incorrect with regard to the phase of the business cycle.
  3. incorrect with regard to monetary policy.

Solution

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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The steeper the yield curve, the higher the expectancy of better future economic performance. Note that we are not talking about yield curve level (basic points of interest rates), but the shape of the curve.

If short term rates are expected to rise in accordance with a less stimulative monetary policy (therefore an expected economic expansion), the yield curve will steep for short-term rates. If longer maturity rates are not steep yet but relatively flat, then this is a hint of a not-full expansive cycle but an early one. Note the case is putting this rationale all the way around, so if you know this, you could answer correct.

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Sócrates

What you thought is right - generally ST i/r decrease means yield curve steepening.

Don’t read too much into it, the question is just more about economics and it seems “steeper” was just loosely used to refer to an increase.

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