Question

what conclusion about inflation expactations would you reach if uou evidenced an inverted yield curve?

Answer 1

An inverted yield curve means that long term interest rates are lower when compared to short term interest rates. This happens when there have been events which will increase the interest rate in the short run. This may move the US Fed to increase interest rates but, on the long run inflation is expected to cool off and interest rates are expected to decrease. This means that long term fixed income instruments do not offer go return and hence this can indicate a recession in the economy in the near future.