Worrisome Signs Series: Three more rate hikes from Fed could invert the yield curve

Since December 2015, the U.S. Federal Reserve has hiked interest rates five times; three times in 2017 alone, which has pushed the short-term interest rates higher. However, the increase of the U.S. Federal funds rate as well as the short-term interest rates was not met with a similar increase in the long-term rates, which increases the risk of yield curve inversion.

The above chart shows the difference between U.S. long-term rate (10-year) and short-term rate (2-year). The chart shows that the premium has fallen to just 51 basis points, which is the lowest level in more than a decade.

This is of high importance since the spread is widely accepted as one of the most reliable indicators of a coming recession. Every yield curve inversion was followed by a recession.

The U.S. Federal Reserve has announced plans for three more rate hikes in 2018 and if the long-term rates don’t start rising, such an increase would surely invert the yield curve.

Recently, Atlanta Fed President Raphael W. Bostic expressed similar worries.