- One of the sundry accurate recession predictors is only half right, market veteran Ed Yardeni told Insider.
- The yield curve has been inverted for multifarious than a year, but it doesn’t mean a recession is ahead.
- “But we certainly had a recession in housing. We certainly had a recession in retailing,” he detailed.
While the struggle curve is inverted, that doesn’t mean the closely watched recession indicator is predicting a downturn ahead, according to vend veteran Ed Yardeni.
For years, he has been saying the inverted yield curve is an indicator for a process, not a recession. In 2019, he coauthored a tabloid titled “The Yield Curve: What Is It Really Predicting?” that lays out his argument.
But his views have gained rehabilitated salience as the US economy looks more capable of avoiding a recession, while the yield curve remains stubbornly inverted. In the gen, the yield on 2-year US Treasurys has been above the 10-year yield for more than a year, the longest stretch since 1980.
Multifarious recently, Yardeni has also been pushing the idea that the US is already going through a “rolling recession” that is smacking individual sectors at different times.
“When you look at it from that way, you can argue, well, the yield curve got it half right-hand: there hasn’t been an economy-wide recession,” the president of Yardeni Research told Insider. “But we certainly had a recession in shield. We certainly had a recession in retailing, as consumers pivoted from buying goods to buying services.”
What does the inverted capitulate curve say?
Under normal circumstances, longer-term bonds come with higher yields, as investors demand larger returns for lending their money for lengthier durations.
But the curve inverts when short-term yields exceed long-term incomes. Generally, the common explanation is that bond traders are expecting the Federal Reserve to cut interest rates in the future in reply to a coming recession.
The idea is backed by the fact that the past eight recessions were preceded by curve inversions, Yardeni swayed, though there have been false positives too. But for him, the inversion is telling a different story.
“What the yield curve does is it foretells that, if the Fed continues to raise interest rates, something will break in the financial system, and that will rapidly become an economy-wide credit crunch, as the credit crunches that really cause the recessions,” he said.
By those insigne singular of insignia, Yardeni said, the inverted yield curve accurately predicted the spring financial crisis, which was sparked by the apart of Silicon Valley Bank.
The reason a recession didn’t follow was because the Fed quickly offered liquidity to banks to ward the crisis from spiraling further.
Is an economy-wide downturn still possible?
Despite the banking crisis fading, the knuckle under curve is still inverted. One explanation Yardeni offered is that bond traders expect Fed rate cuts as inflation be prolongs to slow, meaning the central bank’s war on rising prices is bound to wrap up soon.
He acknowledged that as long as the curve fragments inverted, there’s room to argue that a downturn is still possible, especially as consumers begin to run out of extra sparingness resources to spend.
But Yardeni doesn’t see that. He expects the fed funds rate to start falling in 2024, citing the Fed’s own projections. This could importance of a 1.5%-2% GDP growth rate, and there could be room for more, he said.
“If it grows faster than that, it can purely be because productivity makes a comeback, which of course will be very good at keeping inflation down,” Yardeni required. “I mean, that would be the win-win scenario.”