Understanding Recessions and the Inverted Yield Curve

Recession doesn't necessarily happen when unemployment is low, but historical data shows that recessions have followed periods of low unemployment. The inverted yield curve is not the cause of recessions but rather a predictor of a process leading to recession. The process involves the Federal Reserve tightening policy and bond investors anticipating financial crises, leading to a credit crunch and ultimately causing a recession. In the past, this sequence has been a reliable indicator of an impending recession. The inverted yield curve correctly predicted a financial crisis in March of last year but was averted due to the Federal Reserve's intervention with substantial liquidity. The key is to understand that the inverted yield curve anticipates a crisis rather than directly causing a recession.