Quote:
Originally Posted by Tervuren
The yield curve, as I understand it, inverts for a different reason.
It inverts because demand for long term Treasury bills goes up compared to short term treasury bills. The bidding process on bills mean that the long term ends up at a lower rate.
Inverting the yield curve is also a by product of rapid rate increase.
These were my understandings based on what was shared in a previous thread.
I'm curious why you differ?
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What I was thinking was, if the Fed is going to raise short rates (via Fed Funds rate), it doesn't want to hold long rates down (via QE) because that makes inversion more of a risk.
Long rates are low for various reasons: inflation expectations are low, growth expectations are low, perceived risk is substantial, there's more money than available places to invest, and I'm sure other reasons I don't understand.
The Fed wanted to raise short rates for various reasons but a big one is to get some room to drop them again in the next recession. But the difficult thing is even though some aspects of the US economy are saying it is time to raise rates, inflation and growth aren't high or even really accelerating. So the Fed was raising short rates (from something like 0.25% to over 2%) and long rates weren't rising as much (from 1.35% to just over 3%, and now below 3%).
The yield curve is thus flattening and is actually partly inverted already.
I don't fully understand why an inverted yield curve is a strong recession predictor. Maybe it is the crimp it puts on bank lending that helps cause a recession. Maybe whatever is starting a recession drives the inversion so the yield curve is just a signal not a cause. I dunno. But investors believe inversion -> recession so that's good enough for me.