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He says the signal from the curve suggests money markets should be pricing in a higher probability of the Fed’s policy rate going to zero in the coming year. A

He says the signal from the curve suggests money markets should be pricing in a higher probability of the Fed’s policy rate going to zero in the coming year. Anyone with finance knowledge here? What's the take away, recession, no recession?

asplake 7y ago
Translation: the markets are pricing in the expectation that the Fed will (need to) stimulate the economy by reducing interest rates from their already low (close to zero) levels
jerf 7y ago
There will definitely be a recession, at some point in the future.
apalmer 7y ago
Well according to the people quoted in the article it's a textbook scenario of fed either acts aggressively or recession. That's the take away. Now the quoted folks might be wrong, or they might be right but sometimes the textbook scenario doesn't play out...
formercoder 7y ago
I'm worried about a self fulfilling prophecy. Keep in mind the yield curve represents how the market prices US treasury bonds at differing maturities. When the LT bond yields drop, it's because everyone is buying them. That could happen for a multitude of exogenous reasons. Then though, everyone sees that the yield curve is flattening, panics because it's a recession predictor, and buys LT bonds, thus lowering LT yields further and creating a cycle.
deleted 7y ago
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TheSoftwareGuy 7y ago
I'm not a finance or economics expert, what I've gathered from various internet sources is that yes: the yield curve has been inverted for over 1 quarter, which historically should mean there will be a recession coming. However there are questions about whether it will be right again. One reason is that when the US government implemented Quantitative Easing during the great recession, it did this by buying a bunch of treasuries. There is some question about whether the inverted yield curve we are seeing now may be a result of that, rather than solely a result of investors predicting below zero interest rates.
nscalf 7y ago
The fed can use the rate to effectively decrease the cost of borrowing money. The rational there is if economic activity is slowing, you decrease the cost of spending money. The rate is usually dropped when economic activity slows, and should be increased as economic activity increases. I'm sure people will disagree, but I don't think we've had the rate increase to levels prior to the last recession (though I didn't actually double check). Effectively, anticipating a drop in the fed's rate is an expectation that economic activity will slow (recession behavior) and the fed will have to stimulate it by making money cheaper. To me, the interesting part of this is what the fed does after the rate reaches 0. Read up on Quantitative Easing and Ben Bernanke's response to the last major recession, it's a really interesting environment to learn a bit about.

asplake 7y ago

Translation: the markets are pricing in the expectation that the Fed will (need to) stimulate the economy by reducing interest rates from their already low (close to zero) levels

jerf 7y ago

There will definitely be a recession, at some point in the future.

apalmer 7y ago

Well according to the people quoted in the article it's a textbook scenario of fed either acts aggressively or recession. That's the take away. Now the quoted folks might be wrong, or they might be right but sometimes the textbook scenario doesn't play out...

formercoder 7y ago

I'm worried about a self fulfilling prophecy. Keep in mind the yield curve represents how the market prices US treasury bonds at differing maturities. When the LT bond yields drop, it's because everyone is buying them. That could happen for a multitude of exogenous reasons. Then though, everyone sees that the yield curve is flattening, panics because it's a recession predictor, and buys LT bonds, thus lowering LT yields further and creating a cycle.

deleted 7y ago

[deleted]

TheSoftwareGuy 7y ago

I'm not a finance or economics expert, what I've gathered from various internet sources is that yes: the yield curve has been inverted for over 1 quarter, which historically should mean there will be a recession coming. However there are questions about whether it will be right again. One reason is that when the US government implemented Quantitative Easing during the great recession, it did this by buying a bunch of treasuries. There is some question about whether the inverted yield curve we are seeing now may be a result of that, rather than solely a result of investors predicting below zero interest rates.

nscalf 7y ago

The fed can use the rate to effectively decrease the cost of borrowing money. The rational there is if economic activity is slowing, you decrease the cost of spending money. The rate is usually dropped when economic activity slows, and should be increased as economic activity increases. I'm sure people will disagree, but I don't think we've had the rate increase to levels prior to the last recession (though I didn't actually double check). Effectively, anticipating a drop in the fed's rate is an expectation that economic activity will slow (recession behavior) and the fed will have to stimulate it by making money cheaper. To me, the interesting part of this is what the fed does after the rate reaches 0. Read up on Quantitative Easing and Ben Bernanke's response to the last major recession, it's a really interesting environment to learn a bit about.