A simple macro observation…
In the past, recessions followed inverted yield curves – when long-term market rates dip below short-term market rates. That hasn’t been true this time around, yet, probably because that phenomenon typically involves aggressive Fed rate cuts to help normalize the yield curve (bring it back into positive territory). This time, the yield curve has begun normalization without those cuts, mostly due to long duration rates rising because of inflation fears, solvency concerns, and other factors.
Probably a cleaner and more accurate way to think about interest rates and their effect on the economy is to look at general levels across durations relative to where they have been. So, both direction and rate of change. What’s clear in looking at that in the chart below is that recessions are always proceeded by rising rates, both short and long duration. Thus far, we haven’t seen the rise in rates over the last few years result in an official recession declaration. This seems odd given the long period of low rates from which we came. It seems reasonable that the economic drag from this change will eventually lead to real world consequences, just as it almost always has in the past.
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