>[mbs] The Fed is certainly at war w/debt reduction
>if they jack up the short rates while debt goes
>down, giving rise to the fabled inverted yield
>curve.
I've never read or heard a definitive explanation of why an inverted yield curve is a reliable predictor of slowdown and/or recession, though it is; it's a much better forecasting tool than, say, the stock market. But one reason may be that the long rate is closer to the long-term "equilibrium" or "natural" interest rate (I'll get in big trouble with the postkeynesian weenies for this, but there you go), and the short rate is under much more direct policy control. So the long rate is a guide to what short rates would be if the central bank weren't pushing or pulling on its string. But if the yield curve is inverting because of the long-bond shortage, the inversion may be of less significance than otherwise. Maybe.
Doug