Recession is coming and could start this month as 'we are already slowing,' says developer of the yield-curve indicator

• A recession is coming and "we are already slowing," said Campbell Harvey, who developed the yield-curve indicator.
• A contraction may begin this month and last two or three quarters, he told the Wall Street Journal.

A recession is coming and it could even start this month, according to the developer of the yield-curve indicator.

In January, Duke University professor Campbell Harvey expressed some uncertainty on whether the inverted curve was sending a reliable signal about a contraction.

But since then, that doubt has evaporated.

"We are already slowing," he told The Wall Street Journal. "The question is how deep the recession will be."

Harvey added that a downturn could last two to three quarters and placed the blame on the Federal Reserve's aggressive rate hikes, calling a recession a "self-inflicted wound" by the central bank.

He also warned about the effect of the Fed's tightening campaign on the bank sector, which has seen a string of failures among regional banks.

"When you sharply invert the yield curve, it puts stress on the banking system," he told the Journal. "I believe that our risk to the banking system is much worse than people believe."

Harvey is best known for a 1986 dissertation in which he trail blazed a new way to predict downturns. It relies on comparing the yields of 10-year Treasurys against those of 3-month bills.

In periods of economic growth, short-term bills will provide lower yields than longer-term ones, as investors are more eager to bet on the near future. But when these yields "invert," and 10-year Treasurys gain demand over short-duration T-bills, it signals economic uncertainty.

For the past eight inversions, Harvey discovered that a recession has always followed.

The yield curve has remained inverted throughout the year. At the start of this week, 10-year Treasurys yielded 3.715% against 5.253% for 3-month bills.