On Tuesday morning most of us woke up to the headline, “Yield Curve Inverts”. Depending on who you follow, the title may have been much more dramatic. Perhaps something like, “Interest Rates Signal Recession”, or so on. What every one seems to understand is simple, when the yield curve inverts, that is a historical signal for a coming recession. Of course, nobody knows how far out that recession may be, it could be months or years. But what is an inverted yield curve? And why would it signal a changing market cycle?
On December 14, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate by 0.25% — to a range of 0.50% to 0.75%. This was the second increase since December 2008, when the benchmark rate was lowered to a near-zero level (0% to 0.25%) during the Great Recession.