Which phase of the business cycle is most likely to see a flattening yield curve?
Early expansion or late expansion.
Based on my understanding it is a late expansion.
But answers says early expansion.
Greetings friend! In answer to your question, here’s my understanding for what it’s worth:
The yield curve is basically flattening starting through early expansion phase all the way through late expansion to the slowdown phase, where the yield curve may actually invert. The yield curve is generally steepest at the end of the contraction phase and beginning of the initial recovery phase… and then begins to flatten starting in the early expansion stage and continuing through late expansion all the way to the point of possible inversion during the slowdown phase.
I believe the idea behind the question’s answer, that you described above, is the marked difference between the initial recovery stage and the early expansion stage. During initial recovery, the yield curve is steep. It begins to flatten in early expansion. So this is the point where you’re definitely seeing flattening of the yield curve - it marks the transition between recovery and expansion.
The logic behind it is partially explained by what the government is doing with short-term interest rates. Governments generally make their monetary policy with tweaks to short-term interest rates (called “policy rates”). When governments need recovery, they reduce short term interest rates to promote business. Short-term rates are less than long-term rates therefore, and the yield curve is steeper. When the economy gets too hot and inflation is high, governments will raise short-term interest rates to try to cool inflation down etc. So short-term rates will get closer in level to longer-term rates and this is why the curve flattens during the 2 expansion phases.
Cheers - good luck - you got this 
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I agree with every point you mentioned: Here is a contradictory statement, " At early expansion + output gap, LT-ST= decreasing so curve has to steeper."
Greetings again friend! If LT-ST (I assume we are talking about subtraction here and looking at the difference between then two) is decreasing then by definition the curve is flattening, and not steepening. The difference between rates at either end of the curve is decreasing and flattening out.
When LT-ST is increasing, not decreasing, the yield curve is steepening. I would just focus on this logic and not worry about what may have been written that’s causing potential confusion (and seemingly mistaken by the author).
Cheers - good luck - you got thisđź‘Ť
Can someone make a summary about the YC in all of the business cycle (Inicital recovery, early expansion, late expansion, slowdown, recesion)
From my understanding:
- initial recovery: low, maybe decreasing
- early expansion: Flat or rising
- late expansion: Flat or rising (more flat)
- Slowdown:Short-term interest rates are high, perhaps still rising, but likely to peak.
- recession: Stepeness curve
Is this okey?
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The phase of the business cycle most likely to see a flattening yield curve is the late expansion phase.
During the early expansion phase of the business cycle, the economy is recovering from a downturn, and there is typically an increase in economic activity. This phase is characterized by rising corporate profits, improving business conditions, and increasing investor optimism. As a result, there is often a higher demand for borrowing, leading to a steeper yield curve.
However, as the business cycle progresses into the late expansion phase, the economy reaches a more mature stage. Economic growth may start to slow down, inflationary pressures may increase, and central banks may respond by raising interest rates. In this phase, the yield curve tends to flatten or even invert.
A flattening yield curve means that the difference between short-term and long-term interest rates narrows. This can happen when short-term interest rates increase due to monetary policy tightening, while long-term interest rates remain relatively stable or increase at a slower pace. The flattening yield curve suggests that investors have concerns about future economic growth and inflation, leading to a decrease in longer-term borrowing costs.
Therefore, during the late expansion phase of the business cycle, a flattening yield curve is more likely to occur.