by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
You may have heard news about the yield curve inverting and that it portends a recession. But what is it, and what does it mean, exactly?
Paul Cwik, University of Mount Olive professor of economics and finance who also is a teaching professor of the BB&T courses in free market economics at NC State, explains in this essay: “Inverted Yield Curves, Recessions, and You.”
Prof. Cwik is uniquely suited for this subject. As he explains:
In 2004, I finished my dissertation examining the relationship between the yield curve and economic downturns. What I found is that this is a very complex relationship. The reason why short rates are changing is simply due to changes in supply and demand. The difficulty lies in tracing those root causes of these changes. In order for the short-term rates to climb, there must either be a decrease in the supply of loanable funds, an increase in the demand for loanable funds, or a combination of both forces.
If you’re interested in exploring this complex relationship and its implications for the future, I encourage you to read the piece.