CFA L3 learning notes-CME-The Monetary and Fiscal Policy Mix
LOS-interpret the shape of the yield curve as an economic predictor and discuss the relationship between the yield curve and fiscal and monetary policy
Exibit 1, Effect of Persistent Policy Mix on the Average Level of Rates
Exibit 2: Rates, Policy, and the Yield Curve over the Business Cycle
| Cycle Phase | Monetary Policy & Automatic Stabilizers | Money Market Rates | Bond Yields and the Yield Curve |
|---|---|---|---|
| Initial recovery | Stimulative stance. Transitioning to tightening mode. | Low/bottoming. Increases expected over progressively shorter horizons. | Long rates bottoming. Shortest yields begin to rise first.Curve is steep. |
| Early expansion | Withdrawing stimulus | Moving up. Pace may be expected to accelerate. | Yields rising. Possibly stable at longest maturities. Curve is flattening.Front section of yield curve steepening, back half likely flattening. |
| Late expansion | Becoming restrictive | Above average and rising. Expectations tempered by eventual peak/decline. | Rising. Pace slows.Curve flattening from longest maturities inward. |
| Slowdown | Tight. Tax revenues may surge as accumulated capital gains are realized. | Approaching/reaching peak. | Peak. May then decline sharply.Curve flat to inverted. |
| Contraction | Progressively more stimulative. Aiming to counteract downward momentum. | Declining. | Declining.Curve steepening. Likely steepest on cusp of Initial Recovery phase. |
01 Jul 2023 - by toptradeready.com