Inverted Yield Curve 2019

Sep 2019

The yield curve—a graphical depiction of interest rates for various bond maturities—usually inverts (i.e., shorter-term bond yields exceed longer-term yields, the opposite of the norm) when the Federal Reserve consciously pushes shorter-term rates higher in order to slow the economy and thus combat inflation.  When the Fed wants to slow the economy, it usually gets its way—sometimes leading to a recession.  This time [in 2019], the Fed has been lowering, not raising, short-term rates.  It’s just that longer-term rates have declined faster than shorter-term rates, thus inverting the yield curve.  In turn, longer-term U.S. rates have fallen in good part because interest rates in other countries have fallen even more.  After all, the world is to some degree interconnected economically.  The impact of the European Central Bank and the Bank of Japan driving interest rates negative has contributed to interest rates worldwide being as low as they are.