The Yield Curves Are Still Inverted. Are We Having a Recession or Not?

It was a year ago on July 6 that the 2-year to 10-year Treasury yield curve inverted, which would typically be taken as a sign of a coming recession even if around for a much shorter time. But Monday, July 3, brought an additional portent, as the 108-basis point difference hit the widest gap since a 109.5 percentage point difference one day in 1981, as Reuters reported.

Those old enough to have been in business at the time might remember the massive inflation and the federal funds rate eventually nearing 20%.

Things have not reached that point yet today, although it is worth noting that on June 14, 2023, when the Federal Reserve announced a pause in the long run of rate hikes it had pursued, the 2-and-10-year gap jumped to 0.91, still a wider gap than has been seen since the inversion started last year.

It could be this will become one of the rare times that an inversion over a significant amount of time will not accurately predict a recession within a year or two. But there is so much other information suggesting that the economy could be in for a bad turn. Here are some of the points to consider:

• The Fed is worried enough that Fed Chair Jerome Powell has publicly said the agency expects two more rate hikes this year.
• The Office of the Comptroller of the Currency; the Treasury; Federal Deposit Insurance Corporation; and National Credit Union Administration published a final rule on CRE loan modifications and workouts, which is saying that they expect trouble.
• Fed researchers working on a new index to better understand the economy noted that financial conditions were tighter than any other time since the Global Financial Crisis.

Other central banks have also shown a hawkish visage to their economies. There has been general concern that inflation needed to be reversed and that pushing on tight monetary policies would do the job. There are economists who say triggering the problem were supply chain implosions since the start of the pandemic and that, even if better now, they have continued to keep inflation at elevated levels. Then again, labor markets are tight because there is an historical imbalance of the amount of hiring corporations want to do and the number of people available to do any jobs, let alone considering whether they have the skills most in demand.

At this point, a recession seems most likely, though exactly when and how severe are up for a guess.