UPDATE ON THE TWO-YEAR RATE COMPARED WITH THE FIVE-YEAR RATE

Related to my blog post from November 28, 2018 available here, data that I saw on CNBC show that the five-year interest rate on U.S. Treasury debt dropped below the interest rate on two-year U.S. Treasury debt earlier this week.  What, if anything, does this indicate about economic growth in the U.S. in the future?  Will the ten-year U.S. Treasury interest rate wind up less than the two-year Treasury rate?

QUESTIONS ABOUT THE FLATTENING U.S. YIELD CURVE

I think that I saw interest rate data on CNBC this morning suggesting that the yield curve in the United States has been flattening when looking at federal government debt instruments with relatively short terms to maturity.  The difference between the interest rate on the two-year U.S. Treasury note and the interest rate on the five-year U.S. Treasury note (in this case, the five-year rate minus the two-year rate) has fallen to less than +0.060 percentage points, based on my calculations.  What does this yield gap indicate about expectations for future interest rates?  What does this suggest for future U.S. economic growth?  Will this impact the Federal Open Market Committee's decision on whether or not to change its federal funds rate target?

My understanding is that more focus is placed on the difference between the two-year U.S. Treasury rate and the ten-year U.S. Treasury rate.  However, could the slope of the yield curve based on the two-year rate and the five-year rate growing less steep indicate that the difference between the two-year rate and the ten-year rate will flatten relatively soon?

From an expectations theory perspective alone (so that there is no liquidity premium required for longer terms to maturity), the yield curve growing less steep between the two-year and five-year time horizons indicates that market participants anticipate a smaller increase in interest rates over that time horizon than before.  However, if lenders require a liquidity premium for longer-term loans, then could this narrow difference between interest rates suggest that market participants already expect a decrease in future short-term rates for loans that will be made two years from now?  If so, then does that imply that market participants are forecasting a growth slowdown or a recession in the United States?

(Readers may consider money and banking textbooks such as those by Mishkin (2004) and Burton and Lombra (2006) for more information about expectations theory and the liquidity premium.  They can also consider such sources for more about preferred habitats and the segmented markets theory as they may also relate to interest rate determination.)

SOME THOUGHTS ON RECENT INCREASES IN U.S. M1 VELOCITY

Data available on the web page of the Bureau of Economic Analysis (www.bea.gov) and elsewhere show that real GDP in the U.S. increased in the second and third quarters of 2018 at a faster rate than it increased since the second and third quarters of 2014.  Although it has received much less attention, data accessible from web pages such as the Saint Louis Federal Reserve section of www.economagic.com also show that the velocity of the U.S. M1 money supply has increased for consecutive quarters, the two quarters before the current quarter, for the first time in perhaps roughly a decade.  Was this the end of a period of approximately ten years when the velocity of U.S. M1 decreased most quarters and fell by more than forty-five per cent?  Does this indicate that expansionary fiscal policy (that is, federal deficit spending) has been effective in getting U.S. dollars to trade more frequently (on an annualized basis) in GDP transactions?  Is slower M1 money supply growth a factor?

I think that I saw data on CNBC this afternoon suggesting that the yield curve or the yield gap based on the difference between the two-year and the ten-year interest rate on U.S. Treasury debt is narrowing again.  Will the period of faster economic growth and increasing M1 velocity last?

(Please note that the data above are subject to possible revision.  Thus, the analysis may change.)

U.S. M1 VELOCITY DOWN YET AGAIN IN THE FIRST QUARTER OF 2018

Data compiled by the Bureau of Economic Analysis released late last week indicate that seasonally adjusted, annualized U.S. real GDP increased again but at a slower rate in the first quarter of 2018 than it increased in the fourth quarter of 2017, although the preliminary estimate may have been greater than expected, and the estimate may be revised.  Data released by the Bureau of Labor Statistics (BLS) yesterday (Friday, May 4) show that for April 2018, the U.S. unemployment rate had fallen to an estimated 3.9 per cent, its lowest percentage in more than seventeen years.  Additional data from the BLS suggested that job growth continued in April 2018.  However, at least some (for example, the Atlanta Journal-Constitution newspaper and CNBC’s Sara Eisen on MSNBC’s Morning Joe) reported that both (1) job creation and (2) wage growth were not as strong as expected.  This is despite what may be positive news on the whole about the economy, at least in the short term.

The fact that the velocity of the M1 money supply fell again in the first quarter of 2018 has received less attention.  Evidently, the M1 money supply in the United States must have increased at a faster rate than nominal GDP spending, both seasonally adjusted and annualized, in the first quarter of 2018.  My earlier blog entries and my 2015 book It’s Velocity, Stupid! (short title) noted how frequently this has happened recently in the U.S. – almost every quarter starting with the first quarter of 2008.  It may be worth noting that U.S. M2 velocity has not decreased quite as frequently or by as much over the same interval, and U.S. M2 velocity increased in the first quarter of 2018, at least based on the initial estimates, after also increasing in the final two quarters of 2017.

According to the web page of the Federal Reserve Bank of Saint Louis and according to www.economagic.com, the velocity of U.S. M1 was estimated (subject to revision) to be approximately 5.48 times per year on a seasonally adjusted, annualized basis in the first quarter of 2018.  This represents a substantial decline from its peak (at least within the period in which data are available) of nearly 10.7 times per year in the fourth quarter of 2007, just before quarterly real GDP data began to decrease with the start of the Great Recession.  Has the failure of the velocity of the M1 money supply to remain at least a bit closer to its peak been a missing piece of the macroeconomic puzzle slowing down the recovery from the Great Recession? 

I may soon have more to post about the disappointing economic recovery from the Great Recession as well as more about the velocity of money.  Check my blog for more postings.

HAPPY HOLIDAYS! (Originally from 2017)

(I think that the blog post below is from December 24, 2017.)

Happy Holidays everyone!