Question

Please explain the policy question of whether or not we can forecast recessions by examining interest rates, especially the yield curve.

Answer 1

Yes we can forecast recession with yield curve

First let us understand the background

An yield curve is a polt of interest rates with respect to Time to maturity

In general case long term interest rates are more bonds with longer maturity carries more risk

But in case of recession yield curve is inverted this indicates short term interest rates are more than long term interest rates this is very rare phenomenon this indicates future outlook is very poor which can be lead to recession

So we can forecast recession by observing term structure of interest rates