What do steep yield curves most likely indicate about future interest rates?

Steep yield curves are indicative of the market's expectation for future interest rates. When a yield curve is steep, it typically means that the difference between short-term and long-term interest rates is considerable. This situation often emerges during periods of economic recovery or growth, indicating that investors anticipate higher demand for borrowing in the future due to increased economic activity. As a result, they expect interest rates to rise significantly as central banks may increase rates to combat inflation or to manage the economy.

In essence, a steep yield curve reflects optimism about the economy's potential growth and signals that the market is pricing in higher interest rates to come. This understanding of yield curves is critical in financial planning and forecasting as it influences investment decisions and strategies.