The Flat Yield Curve Is Flagging a Strong U.S. Economy
The slim difference between short- and long-term bond rates doesn’t mean what many think it means.
Powell knows that a flat yield curve isn’t necessarily bad.
Photographer: Drew Angerer/Getty Images North AmericaGiven all the attention it has gotten in recent months, most everyone seems to know that the bond market’s yield curve is dangerously close to inverting, an event that has reliably predicted U.S. recessions in the past. The recent firming of economic growth, however, is a reminder that the shrinking difference between short- and long-term Treasury yields by itself does not indicate economic weakness ahead.
Quite the contrary. The economy tends to grow and stocks advance even as the curve shrinks toward zero. In fact, a yield curve holding at the current levels would suggest a bright outlook for the economy and equities.