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The key indicator of recessions, and the Fed's dilemma


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In a nutshell, if you're really interested in the overall trajectory of the economy, you should be watching the behavior of the 'yield curve'--basically the difference between the interest rate for overnight funds that the Fed sets and the long-term interest rates on Treasury securities.

 

In previous business cycles, nearly all recessions were presaged by the change in the difference between each rate to a value that 'inverts' the curve, i.e. makes it so the overnight rate is higher than the long-term treasury security rate (the latter being a proxy for the return on assets).

 

As the author mentions, the spread between each rate is getting very close to zero right about now, and the curve will almost certainly 'invert' if the Fed proceeds with its planned interest rate hikes.

 

But will it?  The author says the market thinks it will chicken out.  I'm not so sure.  Either way, you should be watching the yield curve like a hawk. 

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