Stockholm (Ekonamik) – The storm clouds may be gathering further following the announcement last week that the Federal Open Markets Committee (FOMC) would hold interest rates steady in the current range between 2.25% and 2.5%, with some analysts believing that the FOMC’s shift to a less-restrictive monetary stance may have injected additional worries into the U.S. economy.
“The Fed communication last week might have helped fuel the market’s recessionary concerns, analysts at Bank of America suggested. The Committee led by Fed Chairman Jerome Powell said it was awaiting signs that the economy would stabilise as the stimulus fades from the 2017 Trump tax cuts.
Investors have so far responded by selling off bonds with a short to date maturity, as markets viewed the Fed’s remarks as an indication of a worsening U.S. economy and that interest rates could fall. The effect of the sell off of short to date maturity bonds as opposed to those with a longer maturity curve is to contribute to the continued inversion of the yield curve, which began last week Friday.
Recessions are usually preceded by similar yield curve inversions, usually 9-12 months prior to a recession.
In addition, a report released Monday from the Federal Reserve Bank of Chicago showed that the economy had possibly slowed further in February, with the three-month moving average of the Chicago Fed’ s National Activity Index slipping to -0.18% in February from its neutral January reading. This index doesn’t indicate a recession until it drops below -0.7%, but the development still indicates an expansion speed below the historical trend, according to the bank.
Former Fed Chairwoman Janet Yellen, however, said the yield curve inversion could indicate the need to cut interest rates at some point, though she noted it she believed it wouldn’t assure a recession would occur.
BloombergOpinion’s Mark Whitehouse suggests that increasing disagreement amongst economists as to what will happen itself indicates a sign of a recession on the way. “Variation can matter… [according to] the standard deviation of predictions for growth over the next 12 months [from Bloomberg economic forecasters] stood at 0.76 percentage points, the largest dispersion since 2012.”
“The level of disagreement makes sense: With variables such as Donald Trump’s trade policy, Brexit, China’s growth prospects, risky corporate debt and an inverted yield curve in play, it’s particularly hard to guess what might happen. Whatever makes economist uncertain might also be what tips the economy into a slump.”
Image: Hussein Twabi, “Storm Clouds Gathering” (Wikimedia Commmons)
