The Federal Reserve’s stunning about-face on rate increases along with weak economic data has left a key part of the U.S. Treasury yield curve close to levels at which the U.S. central bank has in the past been prompted to cut rates.
The spread between U.S. three-month bills and 10-year notes yields on Friday also turned negative for the first time in over a decade, triggering a warning that if the inversion persists a recession may follow in the next one-to-two years. In the past the inversions and subsequent rate decreases have occurred against a backdrop of very adverse events, including the savings and loans crisis in 1989, the implosion of the Nasdaq stock index in 2000 and the U.S. housing decline in 2006.
If long-dated Treasury yields continue to decline the Fed may cut rates as a proactive move to stave off recession. This has been effective before. Rate cuts in 1995 and 1996 helped to push out a recession until 2001.
globeinvestor Let’s hope the fools in Ottawa are paying attention the Canadian economy is headed to recession and Trudeau is busy telling Canadians all is well...
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