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The inverted yield curve\u2014a recession indicator with a decades-long track record of accuracy\u2014has evolved beyond serving as a warning of a future downturn and now sways the economy, its creator said.<\/p>\n
The inversion takes place when long-term bond yields dip below short-term ones, an abnormality that historically has occurred when investors see more growth risk in the near future and demand a higher premium.<\/p>\n
Campbell Harvey, a Duke University professor of finance who originated the idea of the inverted yield curve as a leading indicator, told CNBC on Friday<\/a> that it has predicted eight out of the last eight recessions going back to the 1960s without any false positives.<\/p>\n It has been flashing for about 20 months, and the continued absence of a recession in that time has raised doubts about its accuracy. But Harvey said the lead time has historically ranged from six to 23 months.<\/p>\n Meanwhile, the inverted yield curve has recently changed to become a \u201ccausal mechanism\u201d that can slow economic growth, he added.<\/p>\n \u201cSo people see an inverted yield curve, it changes their behavior,\u201d he said. \u201cSo as a CEO, when you see an inverted yield curve, you\u2019re just less likely to pull the trigger on a bet-the-farm type of investment.\u201d<\/p>\n The Federal Reserve\u2019s aggressive tightening caused the yield curve to invert and needs to undo the damage by cutting rates aggressively too, Harvey said. <\/p>\n To be sure, Fed rate hikes have helped bring consumer inflation down from 9.1% in mid-2022 to just 2.9% in the latest reading<\/a>, the lowest annual rate in three years. But in the process, the economy has cooled off.<\/p>\n Given the inverted yield curve\u2019s strong track record and ability to change behavior, it can also be used to help manage risk, meaning companies will be ready if a recession arrives later this year or early next year, Harvey explained.<\/p>\n Otherwise, a recession that takes companies by surprise will force them to suddenly slash their payrolls, worsening a downturn.<\/p>\n \u201cSo think of this indicator as actually slowing economic growth but leading to a situation where we can have a downturn without a hard landing,\u201d he added. \u201cSo slower growth rather than something like the Global Financial Crisis.\u201d<\/p>\n Recession fears eased<\/a>\u00a0over the past week after a\u00a0weak payroll report<\/a>\u00a0initially set off alarms,\u00a0but concerns continue to linger. For instance, gold prices have set fresh record highs<\/a>, due in part to worries about the economy.<\/p>\n And \u201cBlack Swan\u201d investor Mark Spitznagel, founder and CIO of the private hedge fund Universa Investments,\u00a0told\u00a0Fortune<\/em>\u00a0that a recession is coming this year<\/a>\u00a0as the biggest market bubble in history will soon pop.<\/p>\n \u201cIt\u2019s not different this time, and anybody who says it is really isn\u2019t paying attention,\u201d he said,\u00a0adding \u201cthe only difference is the magnitude of this bubble that\u2019s popping is bigger than we\u2019ve ever seen.\u201d<\/p>\n<\/div>\nRecommended Newsletter: <\/strong>CEO Daily provides key context for the news leaders need to know from across the world of business. Every weekday morning, more than 125,000 readers trust CEO Daily for insights about\u2013and from inside\u2013the C-suite. Subscribe Now<\/a>.<\/div>\n