What yield curve results from tight monetary and tight fiscal policy?

A flat yield curve typically indicates that short-term interest rates are similar to long-term interest rates. This situation can arise from tight monetary policy, where central banks raise interest rates to combat inflation, resulting in higher short-term rates. At the same time, tight fiscal policy, characterized by reduced government spending or increased taxes, can lead to lower demand in the economy. This combination tends to suppress growth expectations and keeps long-term rates from rising significantly, leading to a flat yield curve.

In essence, a flat yield curve reflects market expectations that economic growth will be subdued, which is consistent with the effects of both tight monetary and fiscal policies. These policies can limit the risk of inflation and inflation expectations, creating an environment where short-term and long-term rates do not differ significantly.