The yield curve has been inverted for months. But what has changed over the past year is that the inversion isn't as steep. Back in April 2023, two-year Treasury note yields were about 100 basis points above 10-year yields. Now that gap is 40 basis points. There are a few reasons for this change, and they point toward an upcoming shift to a normal upward-sloping curve in the next few quarters. First, U.S. economic trends have been positive. Fixed-income investors have moved away from fears of deflation and are again seeking a premium in yields versus inflation. That has lifted rates across the yield curve. Second, the Federal Reserve finally is in front of the inflation curve. The central bank is now building a cushion, or a gap, between fed funds and core PCE in order to push inflation back toward 2.0%. That is all well and good -- but if the Fed's gap is too wide for too long, the central bank risks tipping the economy into a recession. Fed Chairman Powell has explained to financial markets that he and his colleagues want to continue fighting stubborn inflation, so they are likely to keep short-term rates high for a period of time, which is where the markets are now. But the day will come when the data shows that the central bank has inflationary pressures at bay, and it will then start to lower rates in order to keep the economy growing. We think that first rate hike will be mid-year. The recent higher-than-expected CPI and PCE reports are pushing out our calls for further rate hikes a few months, but we think that the yield curve will be largely flat by year-end. Then, as the Fed plans to cut further, we think the curve will resume its normal upward slope in 2025.

The yield curve has been inverted for months. But what has changed over the past year is that the inversion isn't as steep. Back in April 2023, two-year Treasury note yields were about 100 basis points above 10-year yields. Now that gap is 40 basis points. There are a few reasons for this change, and they point toward an upcoming shift to a normal upward-sloping curve in the next few quarters. First, U.S. economic trends have been positive. Fixed-income investors have moved away from fears of deflation and are again seeking a premium in yields versus inflation. That has lifted rates across the yield curve. Second, the Federal Reserve finally is in front of the inflation curve. The central bank is now building a cushion, or a gap, between fed funds and core PCE in order to push inflation back toward 2.0%. That is all well and good -- but if the Fed's gap is too wide for too long, the central bank risks tipping the economy into a recession. Fed Chairman Powell has explained to financial markets that he and his colleagues want to continue fighting stubborn inflation, so they are likely to keep short-term rates high for a period of time, which is where the markets are now. But the day will come when the data shows that the central bank has inflationary pressures at bay, and it will then start to lower rates in order to keep the economy growing. We think that first rate hike will be mid-year. The recent higher-than-expected CPI and PCE reports are pushing out our calls for further rate hikes a few months, but we think that the yield curve will be largely flat by year-end. Then, as the Fed plans to cut further, we think the curve will resume its normal upward slope in 2025.

Wells Fargo is one of the largest diversified financial services firms in the United States, with a nationwide network of several thousand branches and a large base of financial advisors. Wells Fargo provides a full range of consumer banking, commercial banking, and investment banking services. The company nearly doubled its assets with the acquisition of the former Wachovia.

Monday Tee Up: A Busy, Busy Week