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Wall Street economists alarmed by 'a powerful signal of recessions' — and it doesn't look good

Economists are becoming increasingly worried about the "yield curve," when the gap between short-term interest rates and long-term rates is shrinking. (Drew Angerer/Getty Images)

Under President Donald Trump's leadership, the economy is booming, unemployment levels have reached near-record lows, and Wall Street has broken countless records.

But some economists are alarmed by "a powerful signal of recessions" that just recently reared its head, according to the New York Times. And  the metric has almost never been proved wrong.

What's going on?

The so-called "yield curve" is what has captured economists' attention. Basically, the yield curve depicts the difference in interest rates between long-term and short-term Treasury bonds, which has proven to be a reliable indicator of overall economic health. The Times explains:

Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation. Lately, though, long-term bond yields have been stubbornly slow to rise — which suggests traders are concerned about long-term growth — even as the economy shows plenty of vitality.

At the same time, the Federal Reserve has been raising short-term rates, so the yield curve has been “flattening.” In other words, the gap between short-term interest rates and long-term rates is shrinking.

Unfortunately, the yield curve sank to an 11-year low last week — just 0.34 percent — a figure not seen since just before the "Great Recession" of 2007-08. However, it's not the "flattening" that triggers a recession.

Instead, the "powerful signal of recessions" occurs when the numbers become "inverted" — or when long-term interest rates fall below short-term rates — New York Federal Reserve president John Williams said earlier this year, according to the Times.

How reliable is the yield curve?

The San Francisco Federal Reserve published a study earlier this year that discovered an inverted yield curve has correctly predicted all nine economic recessions since 1955, with only one false positive in the mid-1960s when "an inversion was followed by an economic slowdown but not an official recession."

On average, the study found the delay between a yield curve inversion and a recession is, on average, 6 to 24 months.

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