The inverted yield curve has been the go-to indicator for recession in the post-WWII period. It is market based and easy to follow even with disagreement on which inversion to follow. The lag relationship has been variable, but the result has been the same. Inverted the curve and the recession is coming. The story was easy. An inverted curve means the central bank is tightening policy. Allow some time for the tightening to hit the economy and we are good to go.
So, what is the issue this time? For one, current Fed policy is not tight as measured by any number of indicators. It may not be loose, but there is not enough of a bit from nominal or real rates to matter. This could be associated with the QE of the past. There is still a lot of money out there even with QT. The markets are less sensitive to rate moves. For example, many homeowners have fixed rate mortgages at low rates. They are not impacted by the higher rates.
We just wait? The recession is coming? The yield inversion is not a good indicator if there is a poor link between the signal and the response. We will just have to look for a new indicator.
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