2023-07-14 05:23:26
(New York) For a year, a red light announcing a recession flashes on Wall Street. But some investors believe that this is a false alarm and that the Federal Reserve will be able to control inflation without a deep economic slowdown.
Updated July 14
Joe Rennison
The New York Times
This alarm signal, the “yield curve”, remained visible in 2023; recently, it has an intensity that we had not seen since the beginning of the 1980s. However, despite this bad omen, the stock market has recovered and the economy remains strong; so some analysts and investors wonder regarding the predictive value of this signal.
On Wednesday, the June consumer price index showed a sharp slowdown in inflation, boosting investor optimism and pushing equities further higher.
Inverted Yield Curve
The yield curve shows the difference between the yield of US federal bonds of different maturities. As a general rule, investors require more interest to lend in the long term, so these yields are generally higher than those of short-term bonds. On a graph, it gives an ascending curve. Over the past year, the curve has been inverted: the yield on short-term bonds is higher than that on long-term bonds.
This inversion suggests that investors expect interest rates to fall…which happens when the economy needs support and the Federal Reserve lowers its key rate.
However, the US economy is slowing, but remains robust, even following a substantial rate hike.
“This time around, I’m inclined to put less emphasis on the yield curve,” said Subadra Rajappa, interest rate analyst at Societe Generale.
One common measure of the yield curve has reached 40-year highs this year: the yield on two-year bonds is regarding 0.9 percentage points higher than that on 10-year bonds.
We saw such a reversal in the early 1980s, when the Fed was fighting runaway inflation, which led to the recession of 1981-82.
It is difficult to predict the time between an inversion of the yield curve and a recession, and this time varies widely. Nevertheless, for five decades it has been a reliable indicator.
Arturo Estrella, one of the first to use the yield curve as a forecasting tool, said this week that inflation generally slows following the onset of a recession, but the rapid pace of rate increases over the past year might upset the normal order.
I still think there will be a recession.
Arturo Estrella, former US Federal Reserve economist
Others believe it might be different this time around, as current conditions are unprecedented: the economy is recovering from the pandemic, unemployment is low, and businesses and consumers are doing quite well.
“Our current situation is very atypical,” says Bryce Doty, portfolio manager at Sit Investment Associates. “I don’t think it heralds a recession. It’s a relief that inflation is coming down. »
This article was published in The New York Times.
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