“We’re not there yet, but we’re getting progressively closer,” said Steven Abrahams, head of investment strategy at the broker dealer Amherst Pierpont. “And I think we will get closer, faster than the market currently anticipates.”
In a speech last month, the San Francisco Federal Reserve president, John Williams, described an inverted yield curve as “a powerful signal of recessions.”
In part, that’s because the yield curve is more than just an economic indicator. It actually helps determine decisions that are crucial to the health of the American economy. That’s because a flattening yield curve makes banking — basically the business of borrowing money at low short-term rates, and lending it at higher long-term rates — less profitable. If the yield curve inverts, it effectively slams the doors on lending. And because debt is the fuel that drives the economy’s engine, a recession often follows.
Mr. Williams stressed that he does not see an inverted yield curve, or recession, coming any time soon. And most economists agree. Over the next few years, private forecasters see United States economic growth peaking at 2.8 percent in 2018 before slowing to 2.5 percent in 2019 and 1.9 percent in 2020, according to Bloomberg data. That’s a bit faster than the 2.2 percent growth rate of the United States economy since 2012.
But it’s basically the same as the 2.6 percent average growth rate since 1980, suggesting that the $1.5 trillion tax overhaul signed into law by Mr. Trump in December is expected to have a negligible effect on long-term economic growth. Doing better would depend on increasing the supply of workers and raising productivity, a poorly understood process generally thought to depend on making large-scale investments in things like education, infrastructure and expensive equipment for companies.
Not everyone agrees that the bond market is sending a warning sign. For much of the last decade, the Federal Reserve and other central banks have been buying government bonds with the aim of pushing interest rates lower to support economic growth.
So the relatively low long-term rates partly reflect the large bond holdings of central banks, said Matthew Luzzetti, a senior economist at Deutsche Bank. That means those low rates contain “much less of a signal about negative growth in the future,” Mr. Luzzetti said.