Powell's curve continues to plunge to lows
The favored bond market indicator of an impending recession used by the Federal Reserve has plummeted to new lows, supporting the argument that the central bank will soon need to lower interest rates in order to boost economic growth.
According to Fed research, the most consistent bond market indicator of an oncoming economic downturn is the "near-term forward spread," which compares the forward rate on Treasury bills for the next 18 months with the current yield on a three-month Treasury bill. This week, this spread hit new lows, closing at around minus 170 basis points on Thursday.
Investors are concerned that the turmoil in the banking sector caused by Silicon Valley Bank's failure in March could tighten lending conditions and harm growth, which has led to an increase in recession worries in recent weeks.
To combat inflation, the Fed has started one of its most aggressive rate-hike cycles in decades, and it expects borrowing prices to stay at current levels through the end of 2023. However, market players are betting on rate reductions later this year because they feel tighter monetary policy is already beginning to damage GDP.
The St. Louis Fed President James Bullard stated on Thursday that the Fed should continue raising interest rates to control inflation while the job market is still robust. Recently, several Fed officials have urged for more rises.
On Thursday, money market investors were overwhelmingly wagering that the Fed will have dropped rates from the current 4.75%-5% range by approximately 70 basis points by December.
Written by: Massimo Scaccia