Why Lower Inflation Could Hurt Chances For Recovery

Although falling inflation is generally good news for the economy, it can have a negative aspect when it is combined with rising interest rates during a recession. Economist Lacy H. Hunt of Carroll McEntee & McGinley Inc. points out that the real inflation-adjusted yield on 30-year Treasury bonds has jumped from under 5% last quarter to nearly 5.4% recently. That's because nominal yields moved higher at the same time that consumer inflation continued to slow. "The sharp runup in real long bond yields is particularly worrisome," says Hunt, "when you remember that real yields below 2.5% fostered recovery in five of the last six recessions."

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