What Central Banks Don’t Know Should Concern You
Money For the Rest of Us
J. David Stein
4.5 • 1.4K Ratings
🗓️ 27 March 2019
⏱️ 33 minutes
🧾️ Download transcript
Summary
Why an inverted yield curve is disconcerting given such low interest rates. Why those low rates could lead to radical central bank policies during the next recession. Thanks to Policy Genius and Blinkist for sponsoring the episode.
For show notes and more information on this episode click here.
- [0:23] Yield curve inversion has generally led to a recession.
- [3:00] Stock market behavior during a recession.
- [5:19] Why has the yield curve inverted?
- [7:04] Understanding who controls and defines the policy rate
- [14:42] Why can’t the economy support higher interest rates?
- [20:08] Fear of the lower bound.
- [22:15] Tools to keep inflation growing.
- [25:31] What we should be doing to protect against what the central banks don’t know.
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Transcript
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| 0:00.0 | Welcome to Money for the rest of us. This is a personal finance show on money. How it works, how to invest it and how to live without worrying about it. |
| 0:10.5 | I'm your host David Stein. Today is episode 246. It's titled, |
| 0:15.0 | What Central Banks Don't Know should concern you. |
| 0:18.4 | Maybe I should say what Central Bank bankers don't know. |
| 0:23.6 | Today we're going to look at what determines interest rates. |
| 0:26.8 | What's it mean now that the yield curve inverted? |
| 0:29.9 | And what does even what's the yield curve? |
| 0:34.0 | Why is the Federal Reserve looking at or evaluating, they're doing a listening tour as they reflect |
| 0:40.5 | on maybe they should change how they go about addressing what is known as |
| 0:45.9 | monetary policy. What is monetary policy? Bottom line, why does any of this matter to your |
| 0:51.8 | investment portfolio? Because it absolutely matters. |
| 0:57.0 | Last week, the yield curve inverted. The yield curve is essentially a graph, a line graph, a plot of interest rates. |
| 1:08.7 | On the left side you have shorter term rates, 30 day Treasury bills, and goes out to six months, one year, three-year, five, seven, |
| 1:17.0 | ten-year, and 30 years. |
| 1:20.2 | What happened was, for the first time since 2007 the yield on 10-year |
| 1:26.2 | Treasury bonds they yielded the interest rate was 2.46% was yielding less than what you could earn on cash, or effectively on 30-day |
| 1:40.4 | Treasury bills. Not by much, just was a little lower. Why is that important? Because every |
| 1:48.4 | recession since 1960, recession being an economic contraction, was preceded by this yield curve inversion. |
| 1:58.0 | And all we mean by inversion is longer term rates are lower than |
| 2:03.2 | rates. Now the 30-year Treasury bond is still higher than |
| 2:06.4 | short-term rates, but every recession. Now that does not mean |
| 2:17.0 | every time the yield curve inverted it led to a recession. In 1966 we had a yield curve inversion, but no recession came about. |
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