The Fed Isn’t at the Mercy of the Yield Curve

Message received loud and clear. Federal Reserve Chair Jerome Powell had his foghorn out on Tuesday blaring that there is nothing, repeat nothing, to stop policymakers from yanking interest rates up in half-point steps. His hawkishness prompted the yield curve to flatten to levels not seen since 2016, setting off alarm bells about a potential inversion - where shorter-dated levels rise above longer-term rates - signaling recession.

But looking at the wider picture of the predictive power of yield curves, it is really only when they invert significantly and for several quarters that the recessionary warning holds up. A brief flirtation can often be a false signal. And while economists surveyed by Bloomberg see a greater risk of the U.S. economy suffering two quarters of shrinkage in the coming year, the chances of recession are still only at 20%.