Fed Admits 'Yield Curve Collapse Matters'
Content adapted from this Zerohedge.com article : Source
The yield curve collapsed over the last year leading the Fed speakers to state that "it is probably nothing". This is in contrast to the yield curve's established track record at predicting recessions.
Now, the San Fransisco Fed has issued a warning about the flattening yield curve.
"[it] is a strikingly accurate predictor of future economic activity.
Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve.
Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession."
Two Fed authors claim the yield curve is sending recession probailities higher.
Every recession over this period was preceded by an inversion of the yield curve, that is, an episode with a negative term spread. A simple rule of thumb that predicts a recession within two years when the term spread is negative has correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession. The delay between the term spread turning negative and the beginning of a recession has ranged between 6 and 24 months.
The key question is which threshold to choose; in other words, how far does the term spread need to decline so that a forecaster should predict a future recession? Analyzing the number of false positives and false negatives for each possible threshold suggests that the best trade-off is accomplished for a threshold very close to zero. There appears to be something special about a negative term spread and yield curve inversions, both for predicting recessions and, according to additional analysis, for predicting output growth.
A negative term yield spread is more worrisome than a lower but positive spread.
Michael Bauer and Thomas Mertens had this to say:
"While the current environment is somewhat special - with low interest rates and risk premiums - the power of the term spread to predict economic slowdowns appears intact".
An extensive analysis of various models leads us to conclude that the term spread is by far the most reliable predictor of recessions, and its predictive power is largely unaffected by including additional variables.
Forecasting future economic developments is a tricky business, but the term spread has a strikingly accurate record for forecasting recessions.
Periods with an inverted yield curve are reliably followed by economic slowdowns and almost always by a recession. While the current environment appears unique compared with recent economic history, statistical evidence suggests that the signal in the term spread is not diminished.
These findings indicate concerns about the scenario of an inverting yield curve.
Any forecasts that include such a scenario as the most likely outcome carry the risk that an economic slowdown might follow soon thereafter.
Non-adapted content found at zerohedge.com: Source
Yes, the yield curve is in trouble. The yield curve is now the flattest since late 2007, with the flattenig accelerating. The problems usually begin after the yield curve inverts, but we're not there yet. Some say it may happen as early as this March or April of 2018. I personally think we will have to wait for collapse another two years or so, but we shell see. Look at the Argentina. Yield of 30 year is around 10% and one year around 20%. We may have still long way to go. Sure, inversion is on the way. However, I dont need that to tell myself which way the wind is blowing, or should I say, which way the hurricane is heading.
Lol, great article ! It is indeed very interesting to see if the negative term spread will have the same effect as the we have never been in a situation like this in history. With these interest rates and money printing, it might prove to be a false indicator this time. I guess we will see ! Also 6-24 Months is quite a range :D
It’s what comes next worries me , keep stacking
Thank you for your post. :) I have voted for you: 🎁! To call me just write @contentvoter in a comment.
This flattening curve should be cause for fear of a curve inversion. At the moment their are slow growth expectations, the monetary policies are tighter.. This surely is a sign of an economic recession in the future. We shall be soon witnessing a slow economic growth if the Federal reserve doesn't get cautious about raising the policy rate
I think they are neither "federal" nor do they "reserve" anything. all they do is continuously devalue the fiat i receive in exchange for not spending time with my family and not doing things that i enjoy. they are devaluing my time and my life. this is not political, it is as personal as it gets.
To listen to the audio version of this article click on the play image.
Brought to you by @tts. If you find it useful please consider upvote this reply.
I like the way you present your imformation am going also begin a websit and be use the web imfo4 like u.
I just learning how trade cryptocurrency but I its steel complex for me
very good post :) informative :) @zer1hedge
Boost Your Post. Send 0.100 STEEM or SBD and your post url on memo and we will resteem your post on 5000+ followers. check our account to see the follower count.
^--- You made this exact same comment at least 96 times in the last couple hours. View these duplicate comments
Upvote this comment to support @duplibot and help reduce spam and superfluous comments.