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Why the yield curve may invert even if the Fed sees inflation pick up

“The analysts said the twin-prongs of policy normalization, higher rates and a shrinking balance sheet, would push short-dated yields higher” writes Sunny Oh for The yield curve is a line plotting the yields across Treasury maturities from the shortest dated to the longest, and can reflect investor expectations for growth and inflation.And with the central bank already raising rates in the face of tepid inflation readings, a pickup in inflation numbers may encourage current Fed.However, some argue the curve’s flattening will gain steam even if inflation normalizes closer to the Fed’s 2% annual target, considered healthy by the central bank.Higher inflation would accompany “higher terminal rate estimates … [and] eventually result in a flatter curve over time,” said Ian Lyngen and Aaron Kohli, interest-rate strategists at BMO Capital Markets.

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