The very sharp Tim Duy comes over to my position on the Fed: Tim Duy: Fed Needs to Get With The Program: "An inverted yield curve is a well-known recession indicator.... Either embrace that relationship in your analysis or reject it on the basis that any signals from the term structure are hopelessly hidden by the massive injections of global quantitative easing.... I... choose the former.... Recession indicator... probability models based on some combination of yield spreads and other leading indicators. Most will be raising red flags like this estimate of the probability of recession in six months...
...based on the 10s2s and 10s3mo spreads and initial unemployment claims.... The risk of recession has risen to levels that demand attention from the Federal Reserve. In the two cases of similar spikes in the 1990s, a recession was avoided by the rapid response of the Fed in the form of rate cuts. The times that response was lacking, a recession followed. So now I switch from analyst to commentator: The above leads me to the conclusion that the Fed needs to get with the program and cut rates sooner than later if they want to extend this expansion. Given inflation weakness and proximity to the lower bound, the Fed should error on the side of caution and cut rates now. Take out the insurance policy. It’s cheap. There will be plenty of opportunity to tighten the economy into recession should inflation emerge down the road...
#noted
