President Trump is distressed about the “CRAZY INVERTED YIELD CURVE,” and he doesn’t feel “clueless Jay Powell” (who, in case you have forgotten, is Trump’s own appointee to the chairmanship of the Federal Reserve) is doing enough to address it. The stock market, which fell 800 points today, looks pretty distressed too.
The “yield curve” refers to how interest rates on Treasury bonds change with the maturity of those bonds. If you’re lending money for a longer period, you can usually expect to earn a higher interest rate. When shorter-term bonds pay higher interest than longer-term bonds, that’s an inverted yield curve. This has often been a sign of an impending recession because it shows that investors expect interest rates to fall in the near future.
summed up the difference between the two measures nicely on Twitter: “2yr/10yr measures econ strength … 3m/10yr measures Fed policy.” I will explain this distinction and why it makes sense to focus most on the two-year/ten-year measure.
Ben Hart and I discussed on Monday, economic data and news events provide a mixed picture, with some numbers that continue to look strong (particularly employment data) while others indicators weaken and downside risks loom, particularly related to China. The inverted yield curve and the barfing stock market are two more data points showing that market participants are increasingly focused on those negative indicators and downside risks.
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