Are interest rates flashing recession?
Date posted: September 10, 2010
The big question about the economy is whether another recession is coming. Of course, some argue the first recession, which began in 2007, never ended. Can the level of interest rates help us answer the recession question? N.C. State University economist Mike Walden responds.
“Economists are always looking for indicators that tell us how the economy is going to turn, whether for the good or for the bad. And actually comparing the level of interest rates — specifically, the level of short- and long-term interest rates — has been one of our best indicators. This is something called the yield curve. And normally — normally — the yield curve is positive. And what that means … is that the interest rate for long-term loans is higher than the interest rate for short-term loans.
“However a very good indicator in the past of an oncoming recession is when that yield curve turns negative — meaning short-term interest rates are higher than long-term interest rates. Now, it has not been a perfect indicator, but it has been one of our best indicators.
“So economists do watch this yield curve, and we use that as some piece of evidence about whether the economy is going to turn positive or negative in the future. Right now — right now — the yield curve is still positive: That is, long-term rates are higher than short-term rates. So based on this indicator, this indicator alone, we would not predict another recession in the near term.”
Category: Economic Perspective