Widely Watched Yield Curve at Most Inverted in Decades After Fed Hike

(Bloomberg) — One of the Treasury market’s more widely watched yield-curve indicators extended its inversion after the Federal Reserve’s decision to lift its benchmark rate in line with expectations.

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The yield on the two-year Treasury moved to be as much as 32 basis points higher than the 10-year yield, which slid in the wake of the Fed’s announcement that it was raising its overnight benchmark by 75 basis points. The yield-curve measure was already at a multi-decade low earlier in the day, but hit a new extreme following the Fed’s latest policy release. Yield curves are often seen as a potential indicator of recessionary risk when inverted.

Policy makers, facing the hottest cost pressures in 40 years, lifted the target for the federal funds rate on Wednesday to a range of 2.25% to 2.5%. That takes the cumulative June-July increase to 150 basis points — the steepest since the price-fighting era of Paul Volcker in the early 1980s. The Federal Open Market Committee statement said the central bank “is strongly committed to returning inflation to its 2% objective.”

“The Fed’s focus is squarely on inflation,” Diane Swonk, chief economist at KPMG, said on Bloomberg Television. “They are hammering demand,” she said. “We are going to have much lower GDP.”

The 10-year yield fell as much as 6 basis points to 2.74%, while the 2-year rate briefly edged higher before retreating. Expectations for the path of Fed rate hikes over the coming months, and potentially cuts in 2023, remained broadly unchanged, according to swap-market data. The Bloomberg dollar index slipped and US stocks maintained their gains for the day.

Traders will look to parse Fed boss Jerome Powell’s upcoming press conference on the decision for further details. They will also be alert to incoming data, including gross domestic product figures scheduled for release Thursday.

(Updates with quote, context, latest pricing.)