What is an inverted yield curve & what does it mean?

Apr 19, 2022 | Finconomics 101

Economists like to monitor the relationship between the 2-year treasury rate and the 10-year treasury rate for clues about the economy. When the 2-year rate exceeds the 10-year, the yield curve is considered inverted and an indication that a recession is on its way. As the chart below indicates, the 2-year rate has consistently exceeded the 10-year before past recessions marked by the grey horizontal bars.

The Fed typically sets the short-term rates and the markets set the long-term rates. Slowing economic growth translates into lower market interest rates before the Fed reacts by lowering its rates.

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