Does The Yield Curve Reflect On The Natural Rate Of Interest?

The short answer is no.

The natural rate of interest supposed to reflect on the savings, investment and consumer preferences across time.

According to Roger Garrison, (all bold highlights mine)

``So named by Swedish economist Knut Wicksell, the natural rate of interest is the rate that reflects the underlying real factors. In macroeconomic terms as applied to a wholly private economy, it is the rate that governs the allocation of resources between current consumption and investment for the future. By keeping saving and investment in balance, the natural rate guides the economy along a sustainable growth path. That is, governed by the natural rate, unconsumed current output (real saving) is used for augmenting the economy's productive capacity in ways that are consistent with people's willingness to postpone consumption.

``In the hands of the Austrian economists, the natural rate became the rate that reflects the time preferences of market participants and allocates resources among the temporally defined stages of production. The output of one stage serves as input to the next in this logical and broadly descriptive representation of the economy's production process. The temporal dimension of the economy's capital structure is a key macroeconomic variable in Austrian theory.

``Time preference is simply a summary term that refers to people's preferred pattern of consumption over time. A reduction in time preferences means an increased future-orientation. People willingly save more in the present to increase the level of future consumption. Their increased saving lowers the natural rate of interest and releases resources from the final and late stages of production. Simultaneously, the lower natural rate, which translates directly into reduced borrowing costs, makes early stage production activities more profitable. With the reallocation of resources from late to early stages of production, the preferred temporal pattern of consumption gets translated into an accommodating adjustment of the economy's structure of production."

However, where interest rates are SET by the central banks, the yield curve instead reflects on spurious market signals from monetary policies which brings about clustering malinvestments that lead to the boom bust cycles.

Dr Frank Shostak explains, (all bold highlights mine)

``Once interest rates in financial markets are lowered artificially, they cease to reflect consumers' time preferences. This in turn means that businesses, by reacting to interest rates in financial markets and embarking on investments in long term capital projects, are committing errors, which is to say, making investment decisions that are contrary to consumers' wishes.

``While the Fed has an absolute control over short-term interest rates via the federal funds rate, it has less control over the longer-term rates. It is this fact that gives rise to upward or downward sloping yield curves. The Fed’s monetary policies disrupt the natural tendency towards uniformity of interest rates along the time structure. This disruption leads to the deviation of short-term rates from the natural rate i.e. from individuals' time preferences.

``The artificial lowering of short-term interest rates by the Fed generates profit opportunities that prompt investors to borrow money at lower short-term interest rates and invest in higher yielding longer-term investments. To sustain the positive sloped yield curve the Fed must persist with its easy stance. Should the central bank cease with its monetary pumping the shape of the yield curve will tend to flatten and profits from "playing" the yield curve will disappear."