EconExtra is a series of posts that go beyond the textbook, relate current events and recent developments in the economy to content standards, and provide resource suggestions to help you incorporate current events into your lessons.

The headlines

The first week of April brought a slew of articles informing us that the yield curve had inverted, and with it a greater chance of a recession on the horizon. In fact, the 2-year/10-year curve “inverted” on March 29 for the first time since 2019, and the 5-year/30-year curve on March 28 for the first time since 2006. As we expect interest rates to rise as the maturity of debt is longer, when the shorter interest rate is higher than the longer interest rate, this is often a signal that something is wrong in the economic world. But how concerned should we be?

The following articles can help you and your students put all of this into perspective with good background, explanations, and data. Here are the two main takeaways:

1) An inverted yield curve is a necessary, but not sufficient, condition for a recession. In other words, every recession has been preceded by a yield curve inversion, but not every yield curve inversion has been followed by a recession. And if these recessions do develop, they’ve slowed down quite a bit.

2) The Fed and other economists are focusing more on shorter-term yield comparisons, such as the 3-month/18-month or the 3-month/10-year. Neither has reversed, while the others did in late March, and have even steepened recently, showing strength in the economy.

Sources

These first three articles provide a good introduction to inverted yield curves and their meaning. They are not very long. Let the students take 10-15 minutes to read it first.

Then have students read the LPL Research article “10 Things to Know About Inverted Yield Curves” for more detailed information. There are plenty of charts and graphs that help demonstrate the points made. Then they should be ready to tackle the following questions.

Discussion Questions

1) Do recessions always follow an inversion of the yield curve? Can you find an example in an article or graph?

2) How long does it take after an inversion for a recession to kick in, if so?

3) Why do economists think a 3-month/18-month or 3-month/10-year inversion is a better predictor of a recession?

4) What did economists at the San Francisco Fed think about the 2/10 yield curve so commonly followed?

5) Name two other things you left behind after reading these articles about inverted yield curves that you didn’t know before and that weren’t asked yet.

This post EconExtra: why all the fuss about the inverted yield curve?

was original published at “https://www.ngpf.org/blog/economics/econextra-why-all-the-fuss-about-the-inverted-yield-curve/”