The yield spread is an indicator
of monetary policy and
a predictor of recessions.
The Federal reserve Bank
raises the federal funds rate.
The federal funds rate is
the lowest interest rate
at which commercial banks
can obtain funds.
As the fed funds rate rises,
banks will raise the interest rates
they charge for loans.
As bank loan interest rates rise,
the demand for loans shrinks.
A slowdown in the growth of loans,
causes a slowdown in the growth
of spending.
The yield spread has been
narrowing -- see charts below:
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