While the yield curve is inverted, that doesn't mean the closely watched recession indicator is predicting a downturn ahead, according to market veteran Ed Yardeni.
But the curve inverts when short-term yields exceed long-term yields. Generally, the common explanation is that bond traders are expecting the Federal Reserve to cut interest rates in the future in response to a coming recession. "What the yield curve does is it anticipates that, if the Fed continues to raise interest rates, something will break in the financial system, and that will quickly become an economy-wide credit crunch, as the credit crunches that really cause the recessions," he said.
He acknowledged that as long as the curve remains inverted, there's room to argue that a downturn is still possible, especially as consumers begin to run out of extra savings to spend.
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