4 ms·

The newfound obsession with the yield curve could have interesting effects on the economy. 1. The Fed now pays attention to it, so its indicator value could be

The newfound obsession with the yield curve could have interesting effects on the economy. 1. The Fed now pays attention to it, so its indicator value could be dramatically weakened, or erased. (Previous Feds continued to raise rates after an inversion before previous recessions, while this Fed has done the opposite lowered them.) or... 2. Inversions become a self-fulfilling prophecy. Despite low inflation, low unemployment, and healthy profit growth, markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession.

lbotos 7y ago
do you have a source that the fed used this metric as a reason for lowering rates?
- nostromo 7y ago
  Just go read the Fed's meeting notes. > Several participants also noted that the slope of the Treasury yield curve was unusually flat by historical standards, which in the past had often been associated with a deterioration in future macroeconomic performance. https://www.federalreserve.gov/monetarypolicy/fomcminutes20190130.htm https://www.federalreserve.gov/monetarypolicy/fomcminutes201... (I don't think the latest notes have been released yet, so these are from earlier this year.)
H8crilA 7y ago
It's been known since at least the 80's. It's not newfound. Perhaps the retail investor is more aware of it.
- nostromo 7y ago
  Can you link me to something on that? I'm genuinely curious. The research I've seen all stems from the original paper, published in the late 90s. (And it took two recessions for it to be taken seriously as a recession indicator.)
  - H8crilA 7y ago
    The yield curve is built into all assets - that's how you discount future stock earnings to derive present value. An inversion roughly means that the curve was wrong, i.e. the market was overly optimistic about how low the interest rates are going to be. > Campbell R. Harvey's 1986 dissertation[4] showed that an inverted yield curve accurately forecasts U.S. recessions. https://en.m.wikipedia.org/wiki/Yield_curve https://en.m.wikipedia.org/wiki/Yield_curve
ryacko 7y ago
The yield curve is an indicator of institutional investor expectations. There are other economic indicators that would cause them to be more bearish on bonds.
JamesBarney 7y ago
Sophisticated investors and the Fed have been paying attention to yield curve inversions for a while. But they also look at heaps of other data like manufacturing indices which is one of the first signs of a coming slow down.
- peteey 7y ago
  I would not expect a slowdown in manufacturing to be detrimental to the US because Microsoft, Visa, and Facebook do not make physical things. Much of the US economy's value is in IP.
  - delfinom 7y ago
    Good news then! The Non-manufacturing index is also down.
rorykoehler 7y ago
Low unemployment is not a useful metric for 2 reasons. First is it does not account for people who have dropped out of participating in the labour market. Second is the race to the bottom in many industries. The uberisation of everything is driving income inequality. Eventually if you stop watering the plants they stop bearing fruit. Our economy is all fruit (ie complex financial instruments generating even more dollars for rich people by moving money around) no water (livable income for the masses) these days.
- causalmodels 7y ago
  > First is it does not account for people who have dropped out of participating in the labour market There are alternative measures to U3 (the official unemployment rate). The U5 and U6 measures of unemployment are designed to capture discouraged workers.
  - rsanek 7y ago
    Plus, all of the published rates are extremely highly correlated. It can be hard to agree on what number is "right", but when one rate is relatively low, so are all the other rates.
superfrank 7y ago
> markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession. I don't think you are saying it is, just that the markets believe it is, but the funny thing is that it's not a perfect predictor of an oncoming recession. While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession.
- lazerpants 7y ago
  >While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession. I thought it only inverted once without a recession in the following 30 months. "The U.S. Treasury yield curve has inverted before each recession in the past 50 years and has only offered a false signal just once in that time, according to data from Reuters." https://www.cnbc.com/2019/03/25/the-us-bond-yield-curve-has-inverted-heres-what-it-means.html https://www.cnbc.com/2019/03/25/the-us-bond-yield-curve-has-...
whatok 7y ago
There is no "newfound obsession" with it. If you think about what it means, you cannot have a healthy economy with a prolonged inverted yield curve.

lbotos 7y ago

do you have a source that the fed used this metric as a reason for lowering rates?

nostromo 7y ago
Just go read the Fed's meeting notes. > Several participants also noted that the slope of the Treasury yield curve was unusually flat by historical standards, which in the past had often been associated with a deterioration in future macroeconomic performance. https://www.federalreserve.gov/monetarypolicy/fomcminutes20190130.htm https://www.federalreserve.gov/monetarypolicy/fomcminutes201... (I don't think the latest notes have been released yet, so these are from earlier this year.)

H8crilA 7y ago

It's been known since at least the 80's. It's not newfound. Perhaps the retail investor is more aware of it.

nostromo 7y ago
Can you link me to something on that? I'm genuinely curious. The research I've seen all stems from the original paper, published in the late 90s. (And it took two recessions for it to be taken seriously as a recession indicator.)
- H8crilA 7y ago
  The yield curve is built into all assets - that's how you discount future stock earnings to derive present value. An inversion roughly means that the curve was wrong, i.e. the market was overly optimistic about how low the interest rates are going to be. > Campbell R. Harvey's 1986 dissertation[4] showed that an inverted yield curve accurately forecasts U.S. recessions. https://en.m.wikipedia.org/wiki/Yield_curve https://en.m.wikipedia.org/wiki/Yield_curve

ryacko 7y ago

The yield curve is an indicator of institutional investor expectations. There are other economic indicators that would cause them to be more bearish on bonds.

JamesBarney 7y ago

Sophisticated investors and the Fed have been paying attention to yield curve inversions for a while. But they also look at heaps of other data like manufacturing indices which is one of the first signs of a coming slow down.

peteey 7y ago
I would not expect a slowdown in manufacturing to be detrimental to the US because Microsoft, Visa, and Facebook do not make physical things. Much of the US economy's value is in IP.
- delfinom 7y ago
  Good news then! The Non-manufacturing index is also down.

rorykoehler 7y ago

Low unemployment is not a useful metric for 2 reasons. First is it does not account for people who have dropped out of participating in the labour market. Second is the race to the bottom in many industries. The uberisation of everything is driving income inequality. Eventually if you stop watering the plants they stop bearing fruit. Our economy is all fruit (ie complex financial instruments generating even more dollars for rich people by moving money around) no water (livable income for the masses) these days.

causalmodels 7y ago
> First is it does not account for people who have dropped out of participating in the labour market There are alternative measures to U3 (the official unemployment rate). The U5 and U6 measures of unemployment are designed to capture discouraged workers.
- rsanek 7y ago
  Plus, all of the published rates are extremely highly correlated. It can be hard to agree on what number is "right", but when one rate is relatively low, so are all the other rates.

superfrank 7y ago

> markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession. I don't think you are saying it is, just that the markets believe it is, but the funny thing is that it's not a perfect predictor of an oncoming recession. While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession.

lazerpants 7y ago
>While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession. I thought it only inverted once without a recession in the following 30 months. "The U.S. Treasury yield curve has inverted before each recession in the past 50 years and has only offered a false signal just once in that time, according to data from Reuters." https://www.cnbc.com/2019/03/25/the-us-bond-yield-curve-has-inverted-heres-what-it-means.html https://www.cnbc.com/2019/03/25/the-us-bond-yield-curve-has-...

whatok 7y ago

There is no "newfound obsession" with it. If you think about what it means, you cannot have a healthy economy with a prolonged inverted yield curve.