AUSTIN (KXAN) — While many consumers have been anxiously watching rising gas prices and surging inflation, economists are sounding the alarm about a different warning sign that could point to a future recession.
The yield curve tracks the difference in how much it costs to borrow money in the short-term and the long-term.
When that curve inverts, meaning it’s cheaper to borrow money in the long-term than in the short-term, economists say that’s a sign a recession could be around the corner.
On Friday the difference between the two stood at just .25%, the closest they’ve been since March 2020, before jumping up this week.
Texas State Associate Economics Professor Andrew Ojede talked with KXAN about what this could mean for the economy.
This conversation has been lightly edited for brevity.
Tom Miller: Can you explain what is the yield curve, and what happened to it?
Andrew Ojede: The yield curve is basically a plot of combinations of interest rates, versus time remaining to maturity. So what has been happening in the market, people have been anticipating the Fed to begin raising rates because of higher inflation expectations. Typically what happens when the fed starts to raise rates is the short-term bond interest rates rise disproportionately more than the long-term rates. That leads to the flattening of the yield curve, and if this trend continues, the yield curve would actually become inverted, meaning that the short-term bond rates could rise higher than long-term bond rates. That’s a clear sign that a recession is in plain sight.
Tom: If you have an inverted yield curve, what does history tell us about what happens next?
Andrew: When you have an inverted yield curve that basically means that interest rates are rising quicker than anything else, so the cost of borrowing by many companies will increase. Companies are going to start laying off workers and that could potentially lead to a serious recession.
Tom: What other economic indicators are pointing to this possible recession?
Andrew: Going back to the pandemic, the government pumped a lot of money, COVID bailout (money), but this happened during lockdown when no one was spending these dollars. Toward the end of last year, the fourth quarter of 2021, Americans went all out to start spending this COVID money. So the demand for goods and services has been rising rapidly and that has driven inflation expectations to a very high level.
Tom: How confident are you that we’re heading toward a recession? Is it still a pretty open question?
Andrew: It’s still a pretty open question. It also depends on what is going on in Russia and Ukraine because remember we are highly interdependent. Globalization means the United States doesn’t act alone. We are tied to the rest of the global economy. Typically when there is a crisis in one area, one region of the world, it can impact companies here at home. So there is a very high likelihood that if this conflict in Ukraine continues the United States could face some economic crisis here.