Yield curves tend to lead the economy by six to nine months. The Fed's single biggest mistake was ignoring the recession-warning yield curve inversion that developed last year. So the positive yield curve spread is almost 145 basis points. A more normal economic recovery spread would be about 225 basis p oints. This positive carry would encourage banks to inject credit into the economy by purchasing two-year notes for their investment accounts.
Credit creation is vital to economic recovery.
So the Fed still has more work to do. Base growth is controlled by Fed purchases of Treasury securities, paid with bank reserves and currency injected into the financial system. So the Fed needs to further reduce the funds rate and inject more base liquidity into the economy. To promote economic expansion, this gap must be eliminated. The Fed's shock therapy of two weeks ago, when the funds rate was unexpectedly cut by 50 basis points, was certainly a big step in the right direction.