Chart of the Month: The Yield Curve is an Historic Recession Indicator
Source: Federal Reserve Bank of St. Louis, National Bureau of Economic Research
*Recessions are shaded
The U.S. yield curve – specifically, the difference between 10-year and 2-year Treasury yields, has generated significant market interest in recent months. With the Federal Reserve continuing to lift short-term interest rates as the economy strengthens, the yield curve has narrowed to its flattest level in nearly a decade. Market forecasters are right to be concerned as the slope of the yield curve has been a reliable recession indicator for the last 40 years. History has shown that each time the yield curve inverts, when short-term interest rates are trading above long-term interest rates, a recession is soon to follow. This typically occurs within 6 to 24 months. With Fed officials expected to raise rates further in 2018, there is a strong likelihood the yield curve could invert later this year. While it may seem counter intuitive to think about a recession when the economy is booming and unemployment is at a 60-year low, this signal has had strong predictive power. Some may wonder whether this time will be different.
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