The shifting shape of the yield curve

There is talk of readjustment back towards the normal upward sloping curve that has been absent from the U.S. treasury market for a while already. This will mainly depend not only the degree of resilience of a core inflation rate above the Fed's comfort zone of between 1 and 2 percent, but also on how the housing market tremors unfold (or more specifically on the probability of a possible spillover effect from the sub prime market into other segments of the mortgage market). A steadily weakening dollar and relatively sanguine global growth rates (revised slightly downwards to 4.9% recently by the IMF) doesn't help much in cooling the core inflation rate. On the other hand, the forecasted economic slowdown for 2007 together with the housing debacle may be enough to push unemployment higher and prompt the fed to start lowering rates. In effect, these two opposing forces may be just what is needed to readjust the yield curve back to it's natural upward sloping shape.