Which of the following typically leads to a recession when observed?

An inverted yield curve is often seen as a strong indicator of a potential recession. This phenomenon occurs when long-term interest rates fall below short-term interest rates, signaling that investors have less confidence in economic growth in the near future. In normal circumstances, long-term rates are higher than short-term rates because lending money for a longer period carries greater risk. When this standard relationship reverses, it suggests that investors anticipate a slowdown in economic activity, leading to decreased spending and investment, which can ultimately trigger a recession.

The inverted curve reflects a pessimistic outlook on the economy, and historical trends have shown that this pattern frequently precedes economic contractions. Therefore, when an inverted yield curve is observed, it serves as a warning sign that many economists and analysts monitor closely as a potential harbinger of recessionary conditions.