What economic condition is suggested by an inverted yield curve?

An inverted yield curve occurs when short-term interest rates are higher than long-term interest rates. This phenomenon often signals that investors expect weaker economic growth in the future. When short-term borrowing costs increase relative to long-term rates, it reflects uncertainty or pessimism about the economy's outlook.

Investors may anticipate a slowdown in economic activity, leading them to favor longer-term bonds despite having lower yields, as they look for stability. An inverted yield curve has historically been a reliable predictor of recessions, as it indicates that the market expects declining growth and potentially lower interest rates in the future as the central bank may need to stimulate the economy. Thus, the correct choice indicates a potential for recession based on this economic condition.