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For those of you who have been watching interest rates (and really, who hasn’t), something interesting is happening: the yield curve is starting to invert. In what could be the natural progression of a process that started at least five years ago, the long term interest rates are dropping below the short term rates. And this could be an ominous sign.

A yield curve is the graphing of interest rates of different maturities of a certain type of security. In this case, US Treasuries. The curve basically shows the relationship between short term and long term rates. A normal yield curve will slope upwards from left to right. That is, longer term rates should be higher than shorter term rates. This is largely due to the expectation of growth in the economy and therefore inflation. This inflation means that investors will demand higher rates in order to tie their money up for longer. When the yield curve inverts, it points to an environment where future growth is expected to be lower than current growth.

There are several reasons why the yield curve might invert. Signs of disinflation, slower economic growth, lack of consumer confidence, etc. But a more immediate possibility is the Fed. Yes, we like to blame the Fed for lots of things, but historically there is some evidence for this. And this time around is no different. When the Fed started raising interest rates in December of 2015, the ten year Treasury was yielding about 2%. The overnight fed…

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