A growing number of economists are warning that the likelihood of a recession has increased amid an historic yield curve inversion – a telltale sign of a looming economic slowdown after the Federal Reserve hiked interest rates to their highest levels since the Great Recession on Wednesday had signaled The policy would be more aggressive than previously assumed.
Yields on the 10-year Treasury rose more than 10 basis points to hit a fresh 11-year high of 3.829% on Friday, while the 2-year Treasury hit a 15-year record 4.266% – marking the inversion of the yield curve slightly deepened 50 basis points, the widest gap in more than 30 years.
Since July, the yield curve has inverted – when short-term yields fall below longer-term yields – a sign that investors are more pessimistic about the long-term outlook for the economy, and the inversion only deepened after the Fed cut rates by 75% on Wednesday raised basis points and proposed another unusually large rate hike in November.
In a note to clients, Sevens Report analyst Tom Essaye said the steeper inversion “makes sense” because a more aggressive Fed and higher interest rates, which make borrowing more expensive, dampen demand and economic growth in hopes of reducing inflation dampening, but he also warned that the magnitude of the inversion had become “very concerning”.
A 2018 Federal Reserve study found that every recession over the past 60 years has been preceded by a yield curve inversion, and Essaye says the widening gap between 2-year and 10-year Treasuries “screams that a serious… economic contraction imminent”. adding that “everyone should prepare for a material economic slowdown in the coming months and quarters.”
In a note on Friday, Bank of America economists said they expect the economy to slip into recession in the first half of next year, with real GDP falling 1% after falling 5% last year % had risen, and unemployment rose to 5.6% – possibly erasing more than a year of job gains.
Fed officials on Wednesday doubled their most aggressive campaign to tighten the economy in three decades, raising interest rates by three-quarters of a percentage point for the third straight month and pushing borrowing costs down to 3.25% — the highest since 2008. However, they had originally forecast Having said the federal funds rate would only rise to 3.4% this year, they are now forecasting a rise to 4.4%, suggesting another 75 basis point hike in October could be on the table. “With this new alignment between the Fed and markets, the question now is when and how badly will the recession hit,” said Mace McCain, chief investment officer at Frost Investment Advisors.
Stocks plunged deeper into the bear market after the Fed’s hawkish message, with major indices surpassing their yearly lows on Friday. The S&P 500 is down 23% this year, and economists at Goldman expect it will fall another 3% by December and could take more than a year to recoup losses. The tech-heavy Nasdaq is down 32% since January, while the Dow is down almost 20%. “Looking forward to the next month or two, we don’t have a huge belief in stocks at all,” said Adam Crisafulli, founder of Vital Knowledge Media. “The mood is palpably terrible.”
real estate market
According to the National Association of Realtors, existing home sales fell for the seventh straight month in August as rising interest rates continued to sideline potential homebuyers. In a statement, the association’s chief economist Lawrence Yun called the housing sector “most vulnerable” to Fed rate hikes and said weakness in home sales reflected this year’s escalating mortgage rates, which hit a 15-year high of nearly 6. 3% achieved week — pushing up the cost of monthly payments on new mortgages by more than 55%, averaging hundreds of dollars a month.
Although parts of the economy are already reeling from the Fed’s dovish policies, the job market remains firmly strong, effectively justifying aggressive action. Initial jobless claims were little changed this week, and subsequent claims have actually fallen. However, many experts believe that an imminent cooling of the labor market is inevitable. “It’s possible that, without an outright recession, the unemployment rate could soften up and wages fall — but that’s never happened,” said Bill Adams, chief economist at Comerica Bank.
Despite slowing for the second month in a row, inflation came in at a worse-than-expected 8.3% in August – far below the Fed’s long-term target of 2%. Economists at Bank of America do not expect inflation to return to these levels before late 2024.
Dow plunges 400 points: Goldman Sachs warns stock market crisis will only get worse this year (Forbes)
New mortgages, student loans, credit cards: everything gets more expensive here when the Fed raises interest rates (Forbes)
The Fed hikes rates another 75 basis points, driving borrowing costs to their highest levels since the Great Recession (Forbes)
Housing market recession: Home prices fall when interest rates hit 6% – that much further they could fall (Forbes)