Recession Looming?

Is there a recession looming? Well, history tells that most of the time when the yield curve is inverted, a recession follows. It happened in 2000 and other years. Anyway, it is sometimes hard to understand what raising interest rates means. You hear it all the time. They Fed is raising rates again. What's going to happen to the economy? Mostly, they try to control inflation (which are monitored by monthly CPI reports). Anyway, this is Ben Bernanke's (left) first real appearance as the Fed Chairman. Alan Greenspan retired in January (Maestro is a good book here if interested).

Anyway, I found a good tutorial on what yield curves mean and thought I would post a couple of descriptions. It means a lot on how our economy works and where we are headed on a macrol level. Here we go:

Four types to talk about here: normal, typical move, flattening, inverted.

Normal. Normally the longer you lend somebody money, the more money you want back in return. After all, more time means more risk. So longer-term bonds typically command higher rates of interest than short-term notes and bills. The resulting yield curve -- a graphical representation of the rates of return for short-term to long-term Treasuries -- rises from left to right.

Typical Move. When the Fed starts raising or lowering its target for an overnight bank lending rate -- essentially moving the "short" end of the yield curve -- the entire curve typically moves as well.

Flattening. Recently the Fed has been raising short-term rates. But long-term Treasury rates have been falling. This has led to a "flattening" of the yield curve, where the difference between short-term rates and long-term rates becomes less and less.

Inverted. If short-term rates continue to rise and long-term rates refuse to do so or head even lower, the yield curve will "invert" -- an unusual state when short-term rates are higher than long-term rates. This is often taken as a sign of impending recession. But debate has grown in recent months over whether this is in fact a reliable indicator. The last time the yield curve inverted was in 2000, and a recession followed. The same thing happened in 1989. But an inversion in 1998 proved to be a false alarm.

Anyway, right now we are in the flattening stage. So, everytime Bernanke and the Fed come out and raise interest rates, there is a chance of the yield curve inverting (which means possible recession ahead). Something to think about.