Inversions of the Treasury yield curve, which occur when shorter-term securities have higher interest rates than longer-term ones, have preceded the past seven recessions. But why does the yield curve tend to invert before a recession hits?
In this video, taken from a recent Dialogue with the Fed presentation, St. Louis Fed Director of Research Chris Waller discusses two reasons why: if people expect real interest rates to fall (which is usually viewed as a pessimistic outlook for the economy) and/or if they expect inflation to fall. He also emphasizes that a yield curve inversion doesn’t cause anything; it’s simply a signal.
Additional Resources
- Dialogue with the Fed: Staying Ahead of the Yield Curve
- On the Economy: Which Groups Recovered Their Wealth after the Great Recession?
- On the Economy: Japan’s Lost Decade vs. the US Great Recession
This blog offers relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.
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