The Treasury yield curve has been in the news a lot lately since it inverted.

Yield curve inversion has a perfect track record for being a harbinger of a forthcoming recession. The media doesn’t tell you that the yield curve is a rational predictor because it plays a fundamental role in the fractional-reserve banking system.

Banks make money borrowing on the short end and loaning it out on the long end.

When short-term interest rates are higher than the long term, which is also known as an inverted yield curve, it becomes less profitable for banks to make loans.

The Federal Reserve bamboozles everyone into believing that it has magical power to control the yield curve: The Fed wants to stimulate growth so they cut the Fed funds rate, dropping the short end of the curve, which steepens the curve, and incentivizes banks to make more loans.

Generally, when the Fed starts a rate-cutting period as they started last July, the cuts are because the economic data is deteriorating.

An exception is the infamous “Greenspan put,” which are cuts to support the stock market. The last Greenspan put was in 1998 in response to the fall of long-term capital.

Since 1998 there have been two other rate-cutting periods: 2001 and 2007. Both times was because of deteriorating economic data, and both times there was a recession and the S&P 500 fell at least 50 percent.

If the Fed is indeed cutting interest rates because of deteriorating data, they would never admit it.

However, the market will eventually see the deteriorating data and investors will shift from stocks to bonds driving down the long end of the curve.

Greenspan called this eventuality a “conundrum,” which of course it’s not, in fact it makes perfect sense. The Fed sees the slowdown, but so does the bond market.

 Some argue that overseas investor demand and ending quantitative tightening are other reasons for long-term Treasury yields to fall. I agree, but that only inverts the curve that much more.

I searched “inverted yield curve” on the U-B website. Three of the first five articles were written by outside news sources after inversion had already occurred. The other two were letters to the editor written by me: Inversion is key to watching bull market, July 17, 2018; and Market inversion bad news for economy, June 16, 2019.

None were written by the U-B’s Editorial Board.

The media is habitually behind the curve.

 Richard Strozinsky

 Walla Walla

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