The predictive power of the yield curve is a widely accepted causal narrative. But the history of the yield curve shows that the causal correlation between long and short rates is actually quite weak. While long and short rates tend to move in the same direction, they do so at varying rates. The debut of the Federal Reserve System in 1914 and the advent of modern central bank orthodoxy amid the Great Inflation of the late 1960s to early 1980s contributed to a divergence in how the market sets long and short rates. The yield curve’s predictive accuracy was decidedly mixed in the first half of the 20th century but was ... (full story)