Campbell Harvey explains the yield curve and what makes it an accurate economic predictor
In 1986, Campbell Harvey published his dissertation linking yield curve inversions (rare situations when short-term interest rates exceed long-term rates) to recessions. He studied the four recessions from the 1960s to 1980s and his indicator proved to be accurate.
In the three recessions that followed his dissertation, the yield curve again inverted before each one –including the 2008 global financial crisis.
June 30 marked the day where the yield curve was inverted for a full quarter -- triggering a recession forecast.
“You can’t just look at the seven-for-seven track record. For example, you could have an indicator that fires every quarter (always forecasting recession). It is correct but it has a lot of false signals,” said Harvey, now a finance professor at Duke University’s Fuqua School of Business. “For my model, there have been no false signals yet.”