Mint Quick Edit | The US Fed is caught in a cleft
- Quell inflation or spur economic growth? For now, the US Federal Reserve had held its policy rate steady, but with America staring at tariff-led stagflation, cuts may lie ahead. Does the yield curve of Treasury bonds offer clues?
Central banks in emerging markets often face the dilemma of whether to quell inflation or spur economic growth, but it’s unusual for the US Federal Reserve to be caught in a cleft. This week, it took the safe option of holding its policy rate steady at 4.25-4.5%, while signalling two possible cuts later this year.
America’s new tariffs are expected to not just be inflationary, as import prices rise, but stagflationary, as their disruptive effect slows its economy down.
Also Read: US economy: Is stagflation making a comeback amid Trump turbulence?
The Treasury yield curve reflects market expectations of inflation, interest rates and growth. Normally, short-term bonds yield less than long-term ones, as the latter must account for future rate uncertainty. Post-pandemic inflation followed by Fed rate hikes, however, had lifted yields across the curve.
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Currently, 3-month Treasuries yield more than 1-, 2-, and 10-year bonds—an inversion historically linked to recession risk. Amid US trade-policy quakes, the expected volatility of key variables has made any reading of that yield curve a tricky exercise.
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Yet, on balance, the odds seem to favour a phase of stagflation ahead, with the Fed easing credit to fight a slowdown. Other countries are sure to feel its impact too.
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