Yield curve as an economic indicator

It is generally perceived that inverted yield curve signals a looming recession, as long term yield is lower than short term yield. The subsequent recovery is foreseen when the yield curve steepens. This may have been true to some extent in the past, but the current economic scenario calls for a reassessment of this belief.
Yield curve is not as much an economic indicator as it is an indicator of fed funds rate. Steepening yield curve only signifies lower short term yields. Since fed can’t possibly target below zero, long term yield has to be higher than the current short term yield. It is not a pointer of economic health, in fact, Japan for a long time saw a steep curve throughout the downturn. So to think that US is getting out of recession soon because the steep yield curve indicates so is of questionable logic.


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