3 ms·

While I'm not saying you're wrong (and I'm not pretending to know enough to fully understand all the forces at play here), the article ends with the following s

While I'm not saying you're wrong (and I'm not pretending to know enough to fully understand all the forces at play here), the article ends with the following statement that I find interesting, in light of your comment: > Every time the yield curve inverts there is a theory about why it doesn’t matter. The stock market rallies that often follow inversions further allay fears that it really is different. In the end, it almost always ends up not being different.

nostromo 8y ago
"almost always" Keep in mind this signal was only discovered in 1989. So we have a forward-looking success rate of three out of three recessions predicted within a year or two. 3/3 is great, of course, but it wasn't delivered on stone tablets from Mount Sinai. The strange thing about predictive economic indicators is they often stop being predictive once popularized. Why? For example, in 2000 and 2006/7 the Fed raised interest rates aggressively even after the inversion. However, we know that the current Fed is looking at the curve, and has become much more dovish since the inversion. So it's entirely possible that it's predictive ability will be diminished precisely because policy makers are paying attention to it.
- pmart123 8y ago
  In the current circumstance, one argument is that the Fed overreacted in raising short-term rates, making those rates artificially high. I suppose there is some support for this without looking too deeply into it as the Fed now is unwinding QE. Unwinding QE still is "tightening" monetary policy. My guess is that the Fed believes that by lowering its portfolio's duration is a more effective way to raise longer-term yields to prevent the yield curve from becoming more inverted. I'm not a monetary expert, but I suppose you could say this time is different due to QE/QT, or you could stick with how the market typically reacts after the yield curve inverts.

nostromo 8y ago

"almost always" Keep in mind this signal was only discovered in 1989. So we have a forward-looking success rate of three out of three recessions predicted within a year or two. 3/3 is great, of course, but it wasn't delivered on stone tablets from Mount Sinai. The strange thing about predictive economic indicators is they often stop being predictive once popularized. Why? For example, in 2000 and 2006/7 the Fed raised interest rates aggressively even after the inversion. However, we know that the current Fed is looking at the curve, and has become much more dovish since the inversion. So it's entirely possible that it's predictive ability will be diminished precisely because policy makers are paying attention to it.

pmart123 8y ago
In the current circumstance, one argument is that the Fed overreacted in raising short-term rates, making those rates artificially high. I suppose there is some support for this without looking too deeply into it as the Fed now is unwinding QE. Unwinding QE still is "tightening" monetary policy. My guess is that the Fed believes that by lowering its portfolio's duration is a more effective way to raise longer-term yields to prevent the yield curve from becoming more inverted. I'm not a monetary expert, but I suppose you could say this time is different due to QE/QT, or you could stick with how the market typically reacts after the yield curve inverts.