Susan Li of FOX Business and Ray Wang, founder of Constellation Research, agree, with Wang noting that the US economy overall is “very strong” despite the Russian invasion of Ukraine, inflation and rate hikes.
A closely watched bond market recession indicator has just flashed red, raising fresh concerns that the US economy is headed for a downturn this year.
The spread between 2-year and 10-year Treasury yields reversed on Tuesday for the first time since 2019 amid fears that the Federal Reserve’s aggressive approach to tackling the hottest inflation in four decades could result in a sustained slowdown in growth could lead.
Fed hikes interest rates for first time in 3 years and projects 6 more rate hikes as inflation surges
2-year Treasury note yields rose as high as 2.387%, outperforming 30-year bond yields (which fell to around 2.383%). The yield curve inverted again on Wednesday, with 2-year notes hitting 2.377% and 10-year notes falling to 2.334%.
The spread between 5-year and 10-year government bonds and 2-year and 30-year government bonds reversed earlier this month.
Yield curve inversions, which rarely occur, are considered a good recession indicator as they suggest investors believe economic growth is slowing as long-term bond yields are lower than short-term bonds.
Customers browse food vendors at Grand Central Market on March 11, 2022 in downtown Los Angeles, California. ((Photo by Patrick T. FALLON / AFP) / Getty Images)
“Markets are fixated on the US Treasury yield curve as it is seen as an excellent measure of the economy,” said Anu Gaggar, global investment strategist for Commonwealth Financial Network. “If the economy is healthy and growing, longer-term Treasury rates should be higher than shorter-term rates. If the opposite occurs, concerns about the future economic situation will increase.”
Every recession over the past 60 years has been preceded by an inverted yield curve, according to a study by the Federal Reserve Bank of San Francisco.
However, some experts cautioned that the brief inversion does not necessarily mean a recession is imminent. Joe Brusuelas, chief economist at RSM, said fears of an imminent downturn were “a bit overdone”, although he acknowledged the risks of a downturn do exist.
GALLUP SURVEY SHOWS INFLATION IS AMERICANS’ MAIN ECONOMIC CONCERN
“Economic fundamentals show the probability of a recession in the next 12 months is around 20%, a modest increase compared to before the Russian invasion of Ukraine,” he said.
The bond market move comes as the Fed takes a more hawkish approach to fighting inflation: policymakers hiked rates by a quarter of a point two weeks ago and have since signaled support for a faster half-point hike at their May meeting.
“If we decide it’s appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at one or more meetings, we will do so,” Chairman Jerome Powell said during an economics conference last week . “And if we find that we need to move beyond the usual measures of neutrality to a more restrictive stance, then we will.”
Federal Reserve Chairman Jerome Powell arrives in Washington to address a news conference following the Federal Open Market Committee meeting on Wednesday, December 11, 2019. ((AP Photo/Jacquelyn Martin) / AP Newsroom)
The Labor Department reported earlier this month that the consumer price index rose 7.9% year-on-year in February, the fastest rise since January 1982, when inflation hit 8.4%. The CPI – which measures a variety of commodities ranging from gasoline to health care – rose 0.8% from January.
Some economists believe the Fed has waited too long to stem the surge in inflation, while others have expressed concerns that acting too quickly to stabilize prices could trigger the risk of an economic recession. Rising interest rates tend to result in higher interest rates on consumer and business loans, which slows the economy by forcing employers to cut spending.
GET FOX BUSINESS ON THE GO BY CLICKING HERE
Still, Powell has quashed concerns that an inverted yield curve is signaling that the economy is headed for a recession, maintaining optimism that the Fed can strike a delicate balance between taming inflation without weakening the economy.
“The likelihood of a recession next year is not particularly high,” Powell told reporters two weeks ago, citing the strong labor market, solid wage growth and strong corporate and household balance sheets. “All signs point to this being a strong economy that can thrive in the face of less accommodative monetary policy.”