The Fed's desire for a "soft landing" may be even harder than many economists believe. The 2 and 10 year Treasury bonds inverted for a short time today, as the short term 2-year yields increased. As we learned in class, inversions of the yield curve have historically been predictors of recessions. This inversion is one more in a series of inversions seen since October, with inversions for both 20 and 30-year yields and 5 and 30-year yields.
While an inversion in 2 and 10-year yields occurred in 2019, that was the result of a trade war with China. Now, economists and investors expect contractionary policy from the Fed, who is looking to reduce inflation. Considering the Fed's plan to raise interest rates more aggressively that in the past, traders have "priced in" a total of 8 rate hikes despite the Fed's plan to meet only 6 times for the rest of the year.
However, there are some glimmers of hope. Fed Chair Jerome Powell has stated that Treasury yields around 18 months, his primary focus, have not inverted or showed warning signs. Additionally, considering traders are expecting 8 rate hikes, if the Fed either does not meet their expectations or if they bring rates back down for some reason, long term yields may start increasing again.
https://www.bloomberg.com/news/articles/2022-03-29/u-s-yield-curve-inverts-from-two-to-10-years-in-recession-sign
I think it is definitely important to pay special attention to the treasury bond market since it has historically predicted recession. I think the inversion of the yield curves primarily has to do with the increase of interest rates. While I'm sure Powell is well aware of this, the fed needs to be careful not to push interest rates up too fast as it may push us right into a recession.
ReplyDeleteI think it is a little concerning that Treasury yield curves have inverted, but I wonder if it has to do more with the recent interest rate hike and other current economic events going on, like high inflation and the war with Ukraine, than if a recession is coming or not. If the yield curves continue to invert in the next coming months, I think the Fed might have to rethink their plan of 6 more interest rates hikes throughout the rest of the year, and instead slow down their interest rate increases.
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