The yield curve plots rates on similar assets with different maturities, such as the 10-year U.S. Treasury note and the three-month U.S. Treasury bill. Typically, the difference between the rates (also called the “term spread”) is positive, meaning longer-maturity assets have a higher return than shorter-maturity assets.
However, the yield curve can invert, meaning shorter-term assets have higher interest rates than longer-term assets. Many consider yield curve inversions to be a strong predictor of recessions.
In this video from a recent Dialogue with the Fed event, Director of Research Chris Waller reviews previous yield curve inversions and shows that they are indeed a strong predictor of recessions.