Rising rates, flatter curve: This time isn't different, it just may take longer
09 October 2018 | Markets and economy
The U.S. economy has seen a prolonged period of growth without a recession. As the business cycle has matured, the U.S. yield curve has flattened substantially. We expect further flattening and an increasing likelihood of curve inversion as the U.S. Federal Reserve continues to raise interest rates. Historically, an inverted yield curve has been a strong leading indicator of an economic slowdown. There has been a growing debate, however, on the relevance of this signal in an environment where the bond market has been distorted by quantitative easing (QE). We find that it is still relevant and therefore caution against thinking that "this time is different." Given the current environment and effects from QE, however, the timing may just take longer.