Year Of The Yield Curve

In The Decades Of Surplus Productivity

January 1st, 2025 - Volume 11 (2025), Missive 1 (Wednesday)

• Behavior of the U.S. Treasury yield curves continue to confuse and confound

• Flatter figuratively forever

• Don’t conflate yield volatility for price inflation

The irony in the fact that the only thing that is clear in this new year is that monetary policy is a mess isn’t lost on the Treasury market. This situation, of course, has been building for years as the surplus productivity led widening of the output gap has, by and large, been allowed to encroach across the entire economic landscape pushing labor’s share of income to 76 year lows and price volatility to new heights. These two results strike at the heart of the Fed’s dual mandate of full employment and stable prices which means that momentary policy is increasingly failing the economy as a whole; reflected in the the behavior of the yield curves. Given its generally silent and stealth approach, surplus productivity is the crucial piece that many continue to miss in today’s economic puzzle leaving many bewildered as to just what the Fed is doing or not doing enough of. However, if the ability to predict is the best test of any theory, then surplus productivity’s forecast impact on everything, much less the trending dynamics of the 2yr/30yr yield curve over these past 6 years proves that it is much more than a force to be dealt with; it is THE force to be reconciled with in the economy in 2025 and much beyond.

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Surplus productivity’s widening impact on the output gap and its consequences for monetary policy are fairly well telegraphed because the Fed can only be successful in achieving its goals of full employment and stable prices so long as the output gap is normally shaped; that is to say that the real economy is growing within an acceptable