Typically the flattening of the yield curve is a precursor to an inverted yield curve. In which the short term rates are higher than the long term rates. Typically, this is a precursor to a recession as history would dictate.

The yield curve would have to invert at least 100bps or 1 full percentage point before this happens.

Right now everyone is just being chicken little. No worries, but definitely start bracing for impact. Most everyone on Wall Street is thinking the Fed has gone too far with raising the interest rate and will end up choking the housing market. Thereby choking spending and the economy in general.

Quoted: How does the short term rate get higher than the long term rate? The Fed sets a rate at which banks can get money.  So they set the long term rate, right? What pressures would push the short term rate higher?

We are talking about 2 different things here.

The yield curve refers to the Treasury Bond Market. IE 6mos t-bill, 2 yr note, 5yr note, 10yr note, etc.
The bond market pretty much dictates those yields (notice I did not say rates). When the market feel that the rates have gotten high enough, they start to buy on the longer end of the curve(10yr/30yr bonds) to lock in the higher rates. That make the long term yield of those bonds drop. Since there are no buyers, and more than likely more sellers on the shorter end of the curve, those yields go up. Hence an inverterted yield curve. This has severe ramifications to borrowing cost. That is a lesson best taught in a econ class. Too long to go into here.

The FOMC raises or lowers the Fed Funds rate. The rate in which banks borrow money. This in turn raises or lowers borrowing rate of consumers. Thereby regulating money supply.


Rate = Fixed interest paid on a particular bond
Yield = Overall earned money on a bond less premuim paid or discount earned.

There is an inverse relation between a price of a bond and its yield.