The Federal Reserve’s favourite recession indicator, the inverted yield curve, is flashing a danger sign once again.
This occurs when the U.S. yield on the 10-year Treasury note falls below that of the 3-month note. Historically, this has been a reliable predictor of economic downturns, with a strong track record over a 12-18-month timeframe.
The New York Fed closely monitors this indicator and provides monthly updates on the probability of a recession occurring within the next 12 months.
As of January 2025, the probability was just 23%, but this is expected to change significantly due to the recent inversion in the coming months.
The inversion suggests that investors are becoming more risk-averse and are anticipating a slowdown in economic activity.
While the yield curve inversion has a strong forecasting history, it is not perfect, and there is no certainty that growth will turn negative this time around