"The one sure way to cure an inflation problem is to create a recession."
When the gap between 10-year and 2-year Treasury yields goes negative - meaning short-term debt pays more than long-term - that's an inverted yield curve. In modern economic history it has preceded virtually every recession.
Why? Because markets are pricing in a sequence: the Fed raises short-term rates now to fight inflation, but that tightening kills growth, which forces the Fed to cut rates later. The long end reflects that expected future cut, staying low even as the short end rises.
Last Wednesday 17 June Warsh's first FOMC - confirmed this is where we are now. When Warsh announced the rate decision, the 2-year yield jumped 16 basis points — the largest single-day move on an FOMC announcement day since 2008. And notably, his closing line contained no mention of the 2% inflation target. He said only that the Fed would do "whatever it takes" to preserve price stability. Markets heard that as open-ended tightening.
Most borrowing today is at the short end - buyers generally do not want the duration risk of long-term Treasuries (and normally, higher long-term rates are offered to entice them in). So rate hikes bite hard and fast, they slow down the economy and eventually will stop it... recession. The inverted curve is the market's verdict: the medicine works, but it causes the disease.
The yield curve shown as a weather-warning system moving from sunshine to storm clouds to rain, alongside the "medicine and disease" recession metaphor
This graph shows the inverted and inverting because an inverted graph is the market's predicting a recession; and that often when it actually un-inverts, that is the moment of the recession
The graph shows three phases:
1. Normal curve (Sep 2024)
10-year yield above 2-year yield.
Markets expect normal growth.
No recession signal.
2. Inversion (late 2024 to mid-2025)
2-year yield rises above the 10-year yield.
This is the classic recession warning.
Markets are saying: "The Fed is tightening now, but in future growth will weaken and rates will eventually need to be cut."
3. Un-inversion / Re-steepening (Sep 2025 onwards)
10-year yield moves back above the 2-year yield.
Many people assume this means danger has passed.
Historically, it often means the opposite.
The inversion is the warning shot.
The un-inversion is often when the recession is approaching or beginning.
Why?
Because the curve usually un-inverts when markets become convinced that:
Growth is weakening.
The Fed will soon have to cut rates.
Short-term yields start falling relative to long-term yields.
A useful analogy is:
Inversion - dark clouds gathering on the horizon.
Un-inversion = the first drops of rain.
Many recessions have started after the yield curve had already begun to steepen again ie un-invert.
So looking at the chart above:
The inversion during 2024–25 was the recession warning.
The un-inversion around September 2025 would historically be the period when economists become much more concerned that the recession is now close rather than merely possible.
The sharp rise in the 2-year yield after the June 2026 FOMC suggests markets are again repricing for tighter policy, but the curve remains positively sloped in the chart, so it is not currently inverted.
Inversion - A situation where short-term interest rates exceed long-term rates, historically one of the most reliable recession indicators.
Un-inversion (re-steepening) - The return to a normal-looking yield curve after an inversion. Historically this often occurs shortly before or during a recession rather than signalling recovery.
This revision puts the yield curve at the centre of the story, using the weather metaphor and the three curve phases as the main visual narrative (previously, we focused on policymakers).
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