Inverted yield curve

The term "inverted yield curve" was coined by the Canadian economist Campbell Harvey in his 1986 PhD thesis at the University of Chicago. ==Causes and significance==

The Federal Reserve FOMC sets the Federal funds rate and when they raise the Federal funds rate above the longer term 10 and 30 year US Treasuries it causes the inverted yield curve, to get inflation and demand down, this also causes the job market to cool down and unemployment to rise. short term treasuries such as the 1, 3, and 6 month bonds, closely follow the Federal funds rate, the longer term treasuries are more influenced by inflation levels. There are several explanations of why the yield curve becomes inverted. The "expectations theory" holds that long-term rates depicted in the yield curve are a reflection of expected future short-term rates, which in turn reflect expectations about future economic conditions and monetary policy. In this view, an inverted yield curve implies that investors expect lower interest rates at some point in the future for example, when the economy is expected to enter a recession and the Federal Reserve reduces interest rates to stimulate the economy and pull it out of recession. In that scenario, expected future short-term rates fall below current short-term rates, and the yield curve inverts. A related explanation holds that when investors who value interest income expect recession, a shift in Federal Reserve policy and lower interest rates, they try to lock in long-term yields to protect their income stream. The resulting demand for longer-term bonds drives up their prices, reducing long-term yields. ==Business cycles==

The inverted yield curve is the contraction phase in the Business cycle or Credit cycle when the federal funds rate and treasury interest rates are high to create a hard or soft landing in the cycle. When the Federal funds rate and interest rates are lowered after the economic contraction (to get price and commodity stabilization) this is the growth and expansion phase in the business cycle. The Federal Reserve only indirectly controls the money supply and it is the banks themselves that create new money when they make loans (Debt based monetary system). By manipulating interest rates with the Federal funds rate and Repurchase agreement (Repo Market) the Fed tries to control how much new money banks create. ==As a leading indicator==

It has often been said that the inverted yield curve has been one of the most reliable leading indicators for economic recession during the post–World War II era. Proponents of this position maintain that inversion tends to predate a recession 7 to 24 months in advance. Others are skeptical, for example stating that the inverted yield curve is "not necessarily" a reliable metric for predicting recession, or that it has predicted "nine of the past five" recessions. In 2023, inversion during a labor shortage and low indebtedness raised questions over whether widespread awareness of its predictive power made it less predictive. The longest and deepest Treasury yield curve inversion in history began in July 2022, as the Federal Reserve sharply increased the fed funds rate to combat the 2021–2023 inflation surge. Despite widespread predictions by economists and market analysts of an imminent recession, none materialized, economic growth remained steady, and a Reuters survey of economists that month found they expected the economy to continue growing for the next two years. An earlier survey of bond market strategists found a majority no longer believed an inverted curve to be a reliable recession predictor. The curve began re-steepening toward positive territory in June 2024, as it had at other points during that inversion; in every previous inversion they examined, Deutsche Bank analysts found the curve had re-steepened before a recession began. ==Inverted yield curves outside the US==