• Short-term Treasury yields remain 100 basis points above historic norms, suggesting room for further declines if inflation remains near 2.5%.
• Long-term and intermediate term interest rates align with historical averages, so there is no need for adjustment there.
• The yield curve has flattened, moving away from its prior U-shape as short-term yields are normalizing.
• Further Fed easing is plausible, with potential for another 100 basis point cut in short-term rates if inflation remains contained.

In my 7/21/25 article I asked,  Are Current Interest Rates Too High? What Is Normal? with the following prediction:

Based on history, short-term interest rates have plenty of room to decline IF inflation remains around 2.5%. Short term rates could decline 170 basis point from 4.5% down to 2.8%. Intermediate and long-term bonds are currently near historic norms, so no need for adjustment. The Treasury controls the short end of the yield curve, but the Federal Reserve has stepped on the long end to control interest rates there. The good news is that the Fed won’t need to step in. Reductions in short-term government T-bill yields will put the yield curve near historic norms.

Trending Toward Normal

Two months later, in September, short term interest rates declined 30 basis points, and 5 months later, today, interest rates have declined 70 basis points, trending toward the 170 basis point decline I said would bring the curve back to normal.

Here’s my logic:

Applying the long-term Treasury Bill .3% premium to the current inflation rate of 2.5%, we say 2.8% is the “norm”. However, T-Bills actually yield 3.8% currently, which is 1.0% above the historic norm. Treasury Bill rates are high by this standard.

But long-term Treasury Bond rates at 4.8% are in line with historic norms.

Note also that intermediate-term bonds were lower-yielding, creating an unusual U-shaped term structure that is likely due to investor concerns about the effects of tariffs in the near future that have increased demand for these maturities. Now the yield curve has flattened, so much less U-shaped.

Conclusion

There is precedent for more easing at the next Fed meeting, possibly ultimately  pushing short term interest rates down another 100 basis points IF inflation remains near 2.5%. It will be interesting to see.

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