Confused by what is happening with interest rates? You’re not alone. When the New York Times asked economists what they thought, one said “a recession will happen.” Another was not so sure, saying, “The situation we are in is very different from normal.”
A lot of the concern stems from the upside-down relationship between short-term and long-term interest rates. The Federal Reserve has raised its short-term lending rate to banks multiple times in recent years, the last being in late July by one-quarter of a percentage point to a range of 5.25-5.5%.
That was bad news for borrowers whose loan rates can rise with yields on Treasury securities such as the 1-year T-bill or the 3-year T-note. Those are now higher than those on another closely watched index, the 10-year Treasury bond. That’s what economists and TV talking heads call an inverted yield curve.
Why does this matter, and what can you do about it? The last time short-term Treasury yields were about 1 percentage point higher than long-term ones was in 1980. Then, inflation was raging at over 14%. The Federal Reserve took decisive action, boosting its key rate to more than 17%.
Unemployment rose, and by July 1981 the U.S. was in a recession -- the most severe downturn since World War II. The resulting economic pain lasted 16 months, during which time the jobless rate peaked at 10.8%.
The U.S. economy is in better shape today than in 1980 in terms of unemployment, inflation and consumer spending. Still, the old saying, “Prepare for the worst and hope for the best,” applies. Here’s what you can do:
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