The message from the inverted yield curve is that the Fed has mistakenly raised the short-term overnight and discount rates way to high because they are looking at the inflation they induced two years ago driven by the mistaken shutdown of the economy and thinking this is the same as the demand driven inflation created in the 1970’s.
The Fed arbitrarily sets these rates to simply moderate the amount of reserves held by the primary dealer banks. High rates stimulate people with cash (M2) to buy Treasuries thus draining the bank reserves.
The logic is that this keeps businesses from spending their cash on productive assets like capital goods and R&D and cut costs by reducing their labor force. It’s totally wrong and harmful but they are captives of the monetarist indoctrination they received at their prestigeous universities and no one will dissent for fear of losing power.
What do you mean by demand driven inflation?