More on Yield Curve Inversion

In his New York speech yesterday, Federal Reserve Chairman Ben Bernanke remains in some disagreement with earlier remarks from Timothy Geithner, Federal Reserve Bank of New York President, on the yield curve inversion.

As Reuters reports "One factor Bernanke raised, but downplayed, was that large foreign holdings of U.S. Treasury debt were pushing yields down. Bernanke said this was not the only, or even the dominant, explanation for recent market behavior."

Earlier, Bernanke had blamed the yield curve inversion on an excess of savings because of a dearth of enticing investments. According to Reuters report of his speech, he finds unclear the policy implications of yield curve inversion.

Such lack of clarity on policy implications only means that he has not understood the source of the inversion, or he is trying to be not too sanguine about it. He admits, thus, in his speach: "What does the historically unusual behavior of long-term yields imply for the conduct of monetary policy? The answer, it turns out, depends critically on the source of that behavior."

In earlier remarks to the congress Bernanke has noted the importance of cutting the deficit and if he can agree with Geithner, the policy implications would be quite clear.

However, all this is mostly a simplicistic reading of Bernanke's speech.

The Journal has published the text of Bernanke's speech to the Economic Club of New York. The same text, with no subscriptions required, can be found online at The Federal Reserve Board.

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