The question is what is an inverted yield curve and why does it always predict recessions?
The yield curve is just points on a chart showing interest rates over time and we can look at that chart to see trends.
Trying to predict what will happen in 7 months is really hard, but predicting 7 years from now is nearly impossible. Long term interest rates (i.e. 10 years) obviously include more risk, so unless something dramatic happens. long term interest rates need to higher than short term interest rates (i.e. 2 years).
Governments lower interest rates when the economy is weak and raise them when the economy is booming.
Why Does An Inverted Yeld Curve Predict Recessions?
When short term interest rates are higher than long term interest rates, it means that banks and investors expect the economy to slow down. They believe that governments will reduce interest rates in the future to encourage spending and investment, despite the higher risk over a longer period of time.
In this video, Alexander MacDonald of GlobeInvest Management explains the yield curve and why this may be the first time in 50 years, it does not predict a serious recesssion.
Soft Landing: Is it on the Horizon?
One intriguing aspect of the inverted yield curve is its potential to predict economic recessions. However, we’ll explore the idea of a “soft landing” and why many experts believe it’s likely in the current economic landscape. Understanding this concept can provide you with a balanced perspective on the future.
Alexander shows that even though the economy is slowing down, job growth remains strong. He also emphasizes that the unprecedented stimulus provided amidst the COVID pandemic makes it difficult to rely on past patterns to predict the future.
This means the yield curve should not used as a crystal ball and that we could be in for the a very rare planned ‘soft landing’ of our economy.