This is 'new economy' where recession indicators don't work, according to Fisher Investments

An economic phenomenon called a "yield curve inversion" has long been regarded as an accurate indicator of a recession and normally sets off alarm bells.

This is where the interest rate on short-term 3-month Treasury bills is higher than what's on offer from longer-term 10-year bonds.

The last time the U.S. yield curve inverted was 20 months ago and is yet to correct itself—marking the longest inversion on record so far.

However, according to Fisher Investments, this isn't cause for concern. Why? Because this inversion hasn't led to a credit crunch yet, which elevates the risk of a downturn.

Right now, banks are typically paying much lower interest to savers than the current three-month Treasury rate of 5.52%.

Equally, the rates charged to borrowers taking out business loans and mortgages far exceed the 10-year Treasury yield, which stands at 4.29% at the time of writing.

Collectively, this has allowed bank credit to continue expanding, according to Fisher Investments.

Will the inversion prophecy come true this time around?

Fisher Investments did note that the rate of new lending has slowed over the past 12 months because higher interest rates have sapped demand.

But according to them, the slowdown hasn't been enough to spark a recession.

A big factor here lies in how a recession was widely expected when the yield curve first inverted, prompting businesses to "cut excess proactively to ride out anticipated lean times."

This premature action may have helped prevent the economy from taking a turn for the worse.

While this is promising news, Fisher Investments went on to warn there's still a small chance of a recession striking if credit contracts, but stressed "a lag this long would be unusual."

A bigger question now is whether yield curve inversion has lost its value as an indicator because it has become "too well known and priced in."

"Pundits are starting to suggest inversion’s lack of negative impact heralds a new economy where America’s services sector is big and stable enough," wrote Fisher Investments.

According to them, this allows the U.S. economy to "overcome problems caused by an inverted yield curve in other credit-sensitive parts of the economy—rendering the yield curve an antique with no modern relevance."

This could ultimately cause investors to be dismissive when the yield curve inverts in the future—"giving it surprise power once more."

Optimism about the U.S. economy's prospects was given another boost on Wednesday after it emerged that the consumer price index held at 3.3% in May, which was slightly better than expected.

While this could be heartening news for the Federal Reserve as it weighs up cutting interest rates, cautious policymakers urge patience at the last meeting.

They want to see persistent evidence that inflation is headed in the right direction before making a move.