Last Friday, the U.S. stock market tumbled after the yield curve of U.S. bonds hit an inversion point for the first time since 2007, an important economic indictor for a looming recession that many investors and economists have feared for months.
But according to Janet Yellen, the former chair of the Federal Reserve from 2014 to last year, the inverted yield curve this time is not as apocalyptic as it looks like.
“My own answer is no, I don’t see it as a signal of recession,” Yellen said at the Credit Suisse Asian Financial Conference in Hong Kong on Monday morning, when asked whether the yield curve inversion was really signaling a recession.
A yield curve is a line that plots the interest rates of equally rated bonds with increasing maturity dates. A normal yield curve is up-sloped, meaning that longer-term bonds generate higher returns than shorter-term bonds and is often correspondent to a period of economic expansion; a flat yield curve means longer-term bonds and shorter-term bonds return equally; and, likewise, a down-sloped, or inverted, yield curve means that longer-term bonds generate lower returns than shorter-term ones and is indicative of an economic recession, which is what happened last week.
“In contrast to times past, there’s a tendency now for the yield curve to be very flat,” Yellen explained, adding that this tendency makes it easier for the curve to invert.
That said, Yellen conceded that the U.S. economy is indeed slowing down, and that if the inversion of the yield curve meant anything, it would be a signal for the Fed to cut interest rates, rather than to continue hiking them.
“So, yes, growth is slowing, but I don’t see it slowing to a level that will cause a recession,” she said. “In fact, it might signal that the Fed would at some point need to cut rates, but it certainly doesn’t signal that this is a set of developments that would necessarily cause a recession.”
The U.S. economy closed 2018 with a 3.1 percent GDP growth. The Fed’s outlook for this year is lowered to 2.1 percent.
Under the leadership of Yellen’s successor Jerome Powell, the Fed raised benchmark interest rates four times in 2018 alone as the U.S. economy strengthened—until last week when the policymaking Federal Open Market Committee (FOMC) decided that it would remain “patient” before considering further rate hikes.