This signal is typically only indicative in the United States, as the Fed doesn't officially factor it into the decision making process. Other central banks con

This signal is typically only indicative in the United States, as the Fed doesn't officially factor it into the decision making process. Other central banks consider it, so it does not seem to have the same predictive power. The treasury market reflects demand for 'risk-free' securities, which functionally serve as bank accounts for corporate entities without access to bank reserves on the Fed's balance sheet. When market participants expect rate cuts in the future, long term assets with a locked in yield become more attractive to hold relative to short tenors, as the short dated treasuries need to be rolled more frequently. Additionally, it may be that the curve inversion itself causes greater expense in short term funding (e.g. overnight), leading to potential contractions in economic activity.