The Federal Reserve’s favorite recession indicator is flashing a danger sign again

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Title : The Federal Reserve’s favorite recession indicator is flashing a danger sign again
Link : The Federal Reserve’s favorite recession indicator is flashing a danger sign again

An ominous measure that the Federal Reserve considers a near surefire recession signal again has reared its head in the bond market. The 10-year Treasury yield passed below that of the 3-month note in trading Wednesday. In market lingo, that’s known as an “inverted yield curve,” and it’s had a sterling prediction record over a 12- to 18-month timeframe for downturns going back decades.

In fact, the New York Fed considers it such a reliable indicator that it offers monthly updates on the relationship along with percentage odds on a recession occurring over the next 12 months. At the end of January, when the 10-year yield was about 0.31 percentage point clear of the 3-month, the probability was just 23%. However, that is almost certain to change as the relationship has shifted dramatically in February. The reason the move is considered a recession indicator is the expectation that the Fed will cut short-term rates in response to an economic retreat in the future.

“This is what one would expect if investors are adopting a much more risk-averse attitude set of behavior due to a growth scare, which on periodically sees late in business cycles,” said Joseph Brusuelas, chief economist at RSM. “It’s not clear yet whether it’s more noise or it’s a signal that we’re going to see a more pronounced slowdown in economic activity.” (Ed note: an "inverted yield curve" always indicates a 'recession'.) (Read More)