The analysis of yield curve may well help to predict upcoming economic recession. Yield curve shows how interest rates of debt (usually government bonds) change with the increase of its term to maturity. Usually it is considered by investors that lending money for the long term is more risky than lending for the short term, as it is harder to make any predictions for the longer time horizon, i.e. how the world will change say in 10 years. That is why long-term interest rates are usually higher than the short-term ones. Note, "usually" means “in good times” or when people have somewhat robust expectations about near future. However, when looking to the history we can reveal that before all economic recessions short-term (ST) interest rates became higher than the long-term (LT) ones (the difference between LT and ST is negative). It means that people feel unconfident about economic situation in the near future expecting economic downturn while the in the long term they expect recovery (as it usually occurs in business cycles) and require less rate of return for the long-term investments. So, when you see that ST interest rates become higher than the LT ones you may be almost sure that the economic ression is anywhere near. On the line chart below the difference between monthly interest rates of 10-years US Treasury Bills (long-term) and 1-year US Treasury Bills (short-term) is shown over the time horizon from April 1953 to August 2013.
(16 March 2020) On Sunday, in anticipation of the dire potential effects of the coronavirus on the US economy, the US Federal Reserve slashed the federal funds rates to nearly zero. In addition to a one-percentage-point rate cut decrease—the second emergency rate cut so far this month—the Federal Reserve: Cut reserve requirements for thousands of banks to zero;Announced a $700 billion quantitative easing program ($500 billion of Treasurys, $200 billion of agency-backed mortgage securities) that will be launched Monday with an initial a $40 billion in asset purchases;Decreased the...
(21 June 2021) Fast post-COVID recovery of consumer demand amid supply chain disruptions has resulted in rising inflation in most countries around the world. In many economies, consumer price inflation (CPI) has already exceeded monetary policy targets, but so far central banks are mostly ignoring the rising inflation on the grounds that the acceleration is caused by temporary factors. The reluctance of monetary authorities to combat rising inflation pressure raises a question of whether the world economy may end up with uncontrollably high inflation by the end of the year. By the...
(05 August 2021) To support the economy and health systems during the coronavirus crisis, governments had to increase spending, financing the increase mostly with growing debt. However, buildup in government debt doesn't necessary lead to the deterioration of fiscal stability, at least not in the short term. Eurozone countries, which on average increased government debt by 14% of GDP during 2020, now pay even less to serve higher debts than they did before the pandemic began. In 2020, government debt in eurozone countries increased by an average of 14.1 percentage points, to 98.4%...
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