What happens is known as the “steepness of the yield curve,” with long-term rates rising when short-term rates stand still. It tends to assume faster economic growth. It is the opposite of a “yield curve inversion” known as the harbinger of recessions.
The downside, however, is that the moment seems to have passed when bond markets gave the government a clear signal to do whatever it takes to stimulate the economy and provide essentially endless funding at extraordinarily low costs. This could have an impact on how the Biden government approaches the rest of its economic agenda.
Treasury Secretary Janet Yellen has stressed that low interest rates, which keep the cost of debt servicing down, are important in thinking about how much the government can comfortably borrow and spend.
Speaking at the New York Times’ DealBook on Monday, after discovering that the ratio of government debt to the size of the economy is much greater than it was before the global financial crisis, Ms. Yellen said, “Look at another metric, the more importantly what is the cost of this debt. For example, consider the interest payments on the debt as a percentage of GDP, ”below 2007 levels.
“I think we have more fiscal space than before because of the interest rate environment,” Ms. Yellen told The Times’ Andrew Ross Sorkin.
The more bond yields and associated inflation expectations rise, the more the Biden government would view its potential spending as constrained. Congress is currently working on a $ 1.9 trillion pandemic relief package that Democratic leaders are expected to adopt in March. Then they plan a comprehensive infrastructure plan.
Federal Reserve chairman Jerome Powell will be asking questions from Congress on the central bank’s policy on Tuesday. In other recent appearances, he has stressed the importance of getting the economy healthy before anything else, and stressed that inflation has been too low rather than too high over the past decade.