Quote:
Originally Posted by Saratoga_Mike
There have been seven recessions since 1962. If you examine the 10-year yield less the 3-month T-bill yield, you will note an inversion roughly 18 months (usually closer) prior to every actual recession. The 10s/3-month inversion provided a false signal once: 1965 (a recession didn't follow until about five years later). Currently this metric is inverted by 29 bps (0.29%). This time could be different. We'll see.
How could Fed funds at 2.25% cause a recession? Over the past few years, Fed funds have increased by over four percentage points.* In 1981, total debt** to GDP was roughly 160%. That number is now just shy of 350%. Adjusting for leverage, the Fed has hiked rates eight percentage points in 1981 terms, not 4 percentage points. This exercise oversimplifies things, given government debt has grown at a much quicker pace than consumer/corporate debt, but it's the easiest way to appreciate the fragility of today's levered economy.
*Atlanta Fed estimates the low in Fed funds was around a negative 2%, adjusted for QE
**govt/consumer/corp debt
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This guy has an interesting take on the yield curves and recession.
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