> I've never read or heard a definitive explanation of why an
> inverted yield curve is a reliable predictor of slowdown and/or
> recession, though it is; it's a much better forecasting tool
> than, say, the stock market.
If the sun rises in the morning, why do you have to know why?
Actually, it's probably the other way around: since inversions typically happen when the front end gets raised by the Fed (as opposed to the long end dropping), it's more likely that this *causes* the slowdown rather than predicts it.
> But one reason may be that the long rate is closer to the long-term
> "equilibrium" or "natural" interest rate (I'll get in big trouble
> with the postkeynesian weenies for this, but there you go), and
> the short rate is under much more direct policy control. So the
> long rate is a guide to what short rates would be if the central
> bank weren't pushing or pulling on its string.
I think it's simpler than that; the short end is used to finance all kinds of things (inventory, for a good example) that the Fed would like to slow down. So they do it directly.
> But if the yield curve is inverting because of the long-bond
> shortage, the inversion may be of less significance than otherwise.
> Maybe.
This is certainly a new state of affairs.
/jordan