Yield curve steepness

The yield curve is getting steep again. This is usually good for banks. he classic strategy for borrowing short and lending long will allow for profits to banks. It also tells us that monetary policy is in easing mode. However, the steepness is starting to come at a price. The price is higher inflationary expectations on the long end of the curve. With short rates anchored at close to zero, the steepness can only come one way and that is through higher longer rates. We are in similar territory after the last recession when the Fed lowered rates to one percent except this was the environment that lead to the excesses of the 2007-2008 crisis.

Steep yield curves still produces profit-maximizing behavior. Many will hold ARMs, corporations will borrow short. Consumers will spend more today. We will get the behavior that comes form steepness whether we like it or not.