A flat or inverted yield curve often signals which of the following economic conditions?

A flat or inverted yield curve typically indicates a scenario where investors foresee a slowdown in economic growth or even an impending recession. In a normal upward-sloping yield curve, longer-term interest rates are higher than short-term rates, reflecting investor expectations of future economic growth and inflation. However, when the curve flattens or inverts, it suggests that short-term rates are becoming equal to or greater than long-term rates.

This phenomenon can occur when central banks raise short-term interest rates to combat inflation, leading to concerns that higher borrowing costs will stifle economic activity. As a result, investors may anticipate lower growth rates, leading to a preference for long-term bonds, which can drive down long-term yields. This shift in investor sentiment is a strong signal that a recession could be on the horizon, as it indicates diminishing confidence in future economic conditions.

In contrast, conditions like stable economies or economic growth are characterized by a normal upward-sloping yield curve, as stable growth typically sustains investor confidence in future prospects. Similarly, inflation may be accompanied by rising yields, not a flat or inverted curve. Hence, identifying a flat or inverted yield curve as a signal of recession is crucial for understanding its implications on economic health.