Inverted Yield Curve
Source: Chicago Fed; @MacroAlf
The yield curve plots the interest rates of bonds with similar credit quality based on the maturity of the bonds.
The yield curve for U.S. treasuries is one of the most common used yield curves.
The yield curve can take three different shapes: upward, downward and flat.
This image shows the yield curve for U.S. treasuries from 1960-2020.
A negative yield curve has been the most reliable predictor of when a U.S. recession is going to occur.
This image shows that the yield curve has predicted every single recession except in 1966 when the yield curve inverted, but this turned out to be a false signal because a recession didn't happen for another four years.
This graph is interesting because as I'm writing this on August 4, 2022, the yield curve is inverted at its widest range in 22 years.
Also interesting to note is that we are already technically in a recession based on the definition, which is defined as two consecutive quarters of negative GDP which occurred in Q1 2022 and Q2 2022.
Officially though, the National Bureau of Economic Research's Business Cycle Dating Committee determines whether or not the U.S. economy is in a recession, and so far they haven't said that we are.