Strange times indeed. Yesterday the Fed raised its key rate to 5.5 percent, the highest level in over 20 years. Not, mind you, that the rate is especially high by historical standards. Yet given the weirdness of the the times in which we are living, the central bank’s continued push to fight inflation is remarkable.
Economists say that an inverted yield curve is a telltale of an imminent recession. What is a yield curve? Basically, it tracks how the annual rate of return on a Treasury bond varies as its borrowing period (or years until repayment of principal) increases. Typically, the return increases with the borrowing period although it tends to flatten out over longer periods (see below). The basic reason is that bondholders need to be compensated more for lending their money for longer. We call this the term premium.