A key recession indicator is getting closer to the danger zone — and the Fed can’t ignore it
In the past, including before the Great Recession, an inverted yield curve — where long-term interest rates fall below their short-term counterparts — has been a reliable predictor of recessions. The bond market is not there yet, but a sharp recent flattening of the yield curve has many in the markets watchful and concerned.
The US yield curve is now at its flattest in about 10 years — in other words, since around the time a major credit crunch of was gaining steam. The gap between two-year-note yields and their 10-year counterparts has shrunk to just 0.63 percentage points, the narrowest since November 2007.
…”We believe a pre-condition for the Fed to continue its hiking cycle in 2018 should be higher intermediate and long-term rates,” they wrote in a research note to clients. “Without the latter, we would have doubts on the former.”