The Fed Is Communicating A Recession Is Imminent

Thursday, April 13, 2017
By Paul Martin

by Chris Hamilton via Econimica blog,
Apr 13, 2017

The Federal Reserve is clearly and plainly telling us that it intends to take the US into recession in short order. I’m not sure what message the markets are hearing, but the Fed is messaging two to three more rate hikes this year into (according to GDP) a sluggish and slowing economy. The FFR (Federal Funds Rate) has been raised by 80 basis points and meanwhile the 10yr US Treasury yield has flat-lined. At this pace, the spread (which is as near a full proof indicator of recession as we have) suggests by year end we will have recession. Of course the Fed could halt it’s likely June, September, and December rate hikes (I’m assuming 30bps each…though 50bp jumps aren’t out of the question) and/or the 10yr yield could rise (but below I’ll show why this is highly unlikely). So, absent course correction, the spread on bank lending will vanish and likely turn negative by year end…and the economic impact is recession.

The spread is simply the difference of what banks borrow short, lend long, and live on the spread between the two. The upper and lower bounds of this spread are essentially represented in the chart below by the 10yr US Treasury and the FFR (the Fed influenced overnight lending rate between the largest institutions on reserves held at the Federal Reserve). Again, borrow short on a daily basis at near zero and lend long at near the 10yr yield.

The chart below is the spread between these two rates. Note, when the spread is minimal or negative, recession is either underway or imminent. Pretty much clockwork.

The Rest…HERE

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