Let speculation of interest rate cuts sometime in 2023 begin as the Federal Reserve potentially looks to avoid a recession.
“It is very plausible that yield curves collectively could deliver a stronger recession risk signal at some point next year, which would contribute to an eventual Fed pivot to cut rates again in a 2018-19 style mid-cycle correction,” said Evercore ISI head of global policy and central bank strategy Krishna Guha.
Guha’s analysis comes as the yield curve briefly inverted this week, as traders weighed the potential for continued strong inflation, slowing economic growth and a Fed that could hike interest rates as much as seven times this year.
To that end, the personal consumption expenditures index — a key measure of inflation followed closely by the Fed — rose by 6.4% in February, government data showed Thursday. That marked the fastest rate of inflation since 1982.
Historically, yield curve inversions have been precursors to a recession.
Since 1978, there have been seven yield curve inversions, points out Truist strategist Keith Lerner. The average time from the inversion to the next recession has averaged 16 months.
The shortest period from inversion to recession was six months, which followed the August 2019 signal that occurred prior to the pandemic.
Conversely, the longest time from inversion to recession was 24 months prior to the Great Recession.
Warns Guha, “The signal from such a sustained large inversion across multiple segments of the yield curve in real as well as nominal space may not be that recession is unavoidable (meaning it may be time to cut to zero soon) but rather that a restrictive inflation-fighting stance is no longer necessary (meaning that nominal rates should follow inflation back towards neutral), and a mid-cycle adjustment is required to avoid recession. Of course, if that mid-cycle adjustment did not come soon enough, the recession might still follow.”
Read the latest financial and business news from Yahoo Finance