Submitted by Taps Coogan on the 23rd of July 2018 to The Sounding Line.

Peter Fisher, Dartmouth College Senior Fellow, spoke with Bloomberg in advance of the recent Fed Meeting to share his outlook on the importance of a flattening or inverted yield curve. Although an inverted yield curve as been one of the best indicators of recessions since at least World War II, many, including the Fed, are now arguing that the metric is no longer important, just as it threatens to invert once again.

Peter Fisher disagrees:

“I think it is important to realize the 2-10 curve, the slope of the yield curve, I don’t think of it as a predictor of a recession. I think it causes recessions by squeezing the marginal lender… When the yield curve gets flat, the incentive to lend decreases and so people want to stop lending and that slowly dries up the sources of credit to the economy and it’s hard to predict exactly when that happens, but that’s the challenge. What’s even more difficult this time is the Fed is really doing something to both ends of the yield curve. Their gentle telegraphed interest rate increases,… just like 2004, 2005, 2006, is not having much impact on the long end. The traders all take comfort that the Fed is not going to surprise us. But then the Fed is tapering its balance sheet by running stuff off of the short end, which puts pressure on the Treasury market as the Treasury refinances that. So the Fed is squeezing this yield curve itself. Partly intentionally and partly… without really thinking about it very carefully.”

“In January of 2000, I remember no-one less than Secretary of the Treasury Larry Summers assuring everyone to pay no attention to the flat yield curve. We had a recession within a year.”

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