Economists have been predicting a recession for the U.S. economy ever since the Federal Reserve began aggressively raising interest rates in 2022. This is Econ 101. High interest rates, which make it more expensive to borrow, are intended to tame inflation by slowing business and consumer spending. A rapid and extreme increase in rates, as the Fed has carried out over the last year and a half, can be expected to slam the economy into reverse. The classic example is the early 1980s, when the Fed pushed the economy into a deep recession in order to stop runaway double-digit inflation.1
Long-term bonds generally provide higher yields than short-term bonds, because investors demand higher returns to compensate for the risk of lending money over a longer period. Occasionally, however, this relationship flips, and investors are willing to accept lower yields in return for the relative safety of longer-term bonds. This is called a yield curve inversion, because a graph showing bond yields in relation to maturity is essentially turned upside down (see chart).
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posted in Financial Planning, 2023, Recession
