Paul Krugman: Yield Curve Inversion: "Long-term US interest rates are now slightly below short-term rates. This doesn't happen often–and as far as I can tell, each previous instance has been followed by recession...

...Nobody thinks this is a causal relationship: an inverted yield curve doesn't cause a recession. Instead, it's telling you about average investor opinion: bond buyers see economic weakness ahead, and believe that the Fed will be cutting rates. There is, however, a twist right now which makes the inversion even scarier.... Previous inversions took place at much higher short rates.... This matters.... When short rates are near zero, the yield curve HAS to be upward sloping, because rates can go up but not down.... The yield curve inversion in 2006 reflected at least some probability that the Fed might cut rates by 500 basis points. Now, it doesn't have 500 bp to cut. So this inversion actually reflects a worse outlook for the economy than the number itself suggests. Again, it's not a direct read on the economy; it's a read on what the average bond investor thinks is happening to the economy. But still not encouraging...


#noted

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