Question

66. An inversion of the Treasury yield curve has been associated over many economic cycles with: (a) hyperinflation; (b) a recession 12 to 18 months hence; (c) an exceedingly loose monetary policy stance domestically; (d) none of the above.

Answer 1

Option B

Historically, inversions of the yield curve have preceded recessions in the U.S. Due to this historical correlation, the yield curve is often seen as a way to predict the turning points of the business cycle. What an inverted yield curve really means is that most investors believe that short-term interest rates are going to fall sharply at some point in the future. As a practical matter, recessions usually cause interest rates to fall. Inverted yield curves are almost always followed by recessions.