Rates & Bonds · Macro
The yield curve & the Fed
Short rates follow the Fed, long rates follow growth and inflation expectations. Why inversions matter.
Step 1 of 4 · Overview15 min read ·
Fed funds
set by the FOMC
2-year
expected Fed path
10-year
growth + inflation + term premium
30-year
long-run outlook
| Shape | Meaning |
|---|---|
| Normal (upward) | long > short; growth expected |
| Flat | uncertainty / late cycle |
| Inverted | short > long; markets expect cuts; preceded most US recessions since the 1960s |
Steepener: long yields rise vs short (or short fall faster). Flattener: the gap narrows. Traders express these with DV01-neutral pairs, e.g. long 2y / short 10y weighted by DV01.
An inverted curve is a warning sign, not a timer; the lag to recession has varied from months to about two years.
Next: Practice