When the yield curve inverts, what is usually inferred?

An inverted yield curve occurs when short-term interest rates are higher than long-term rates, signaling that investors expect future economic conditions to deteriorate. This phenomenon is often regarded as a predictor of recession. When the yield curve inverts, it typically reflects investor pessimism about the economy's growth; they may seek to lock in long-term rates that are currently higher than short-term rates due to anticipated declining rates in the future, associated with a slowdown in economic activity.

Historically, an inverted yield curve has often preceded recessions, making it a significant indicator for economists and financial analysts. In this context, the expectation of recession is derived from the understanding that when short-term borrowing costs are perceived as too high relative to long-term growth prospects, economic activity may decline, leading to reduced spending and investment. Thus, the inference that a recession is likely to follow is well-supported by past economic trends and the behaviors of market participants in response to changing interest rates and economic forecasts.