Over the course of the business cycle, monetary policy goes through a cycle from maximally accommodative to maximally restrictive. Generally, monetary policy is most stimulative in the first phase of expansion, when inflation is low and unemployment high. This is reflected in a very steep yield curve that embodies cycle lows in short-term money market rates along with higher rates in longer-maturity bonds that recognize that these short rates are temporary until the economy absorbs more of the slack in labor markets and production capacity.
