The Federal Reserve’s stunning about-face on rate increases along with weak econ...
- The Federal Reserve’s stunning about-face on rate increases along with weak economic data has left a key part of the U.S. Treasury yield curve close to levels at which the U.S. central bank has in the past been prompted to cut rates.
Rather than boost investor confidence, however, “the Fed’s ongoing actions and messaging have left markets more pessimistic than ever about the U.S. economic outlook,” said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York. An exception was in 2006, when the Fed waited 10 months after an inversion of 19 basis points to cut rates. That was followed by the financial crisis of 2007-2009, which resulted in zero interest rates and years of quantitative easing.
If there is an inversion past 12 basis points, “my gut would be it’s not happening for absolutely no reason, it’s happening because there’s some level of nervousness and there are events out there that could cause it,” said Fitzpatrick. In these cases, the Fed cut rates on average about eight months after the three-month, 10-year yield curve first inverted, which in this case would imply a December cut, Hornbach said.
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