Thursday, May 20, 2010
This chart has the best track record of signalling recessions of any that I'm aware of. The blue line is the real Fed funds rate, and the red line shows the slope of the Treasury yield curve from 1 year through 10 years. Every recession for the past 50 years has been preceded by a rise in the real Fed funds rate and an inverted (negatively sloped) yield curve. When real short rates are high and the yield curve is inverted, its because the Fed is aggressively tightening monetary policy, and this eventually strangles the economy.
Conditions today are the exact opposite, and point to continued recovery. The Fed is easy, real short rates are negative, and the yield curve is almost as steep as it's ever been (even though it has flattened somewhat today). It would be astonishing if a recession were to develop given how accommodative financial conditions are today. (And I note that conditions in Europe are quite similar to conditions here in the U.S.)
Posted by Scott Grannis at 10:52 AM