- The main recession indicators issued their biggest warning ever on Tuesday.
- The reversal in 2-year and 10-year Treasury yields reached a record high of 103.5 basis points.
- This came after Fed Chairman Jerome Powell said interest rates were likely to be higher than expected.
A key recession indicator has issued the biggest alarm after Federal Reserve (Fed) Chairman Jerome Powell said benchmark interest rates are likely to be higher than once expected.
The reversal in 2-year and 10-year Treasury yields reached a record 103.5 basis points on Tuesday, according to Refinitiv data. It has since narrowed to 102.4 basis points.
Under normal economic conditions, short-term yields are below long-term yields. But as the Fed continues to tighten policy to keep inflation in check, 2-year and 10-year yields have reversed for months amid growing recession fears.
The 2-year yield is currently 4.992%, while the 10-year yield is 3.968%. Meanwhile, there is a 61.6% chance the Fed will raise its benchmark interest rate by 50 basis points on March 22, up from 31.4% the day before.
Hopes of a less hawkish Fed rose briefly earlier in the year when price data showed improvement in inflation. Since then, however, the economy and inflation have remained resilient, according to new reports.
start with Appearance for two days Speaking to Congress to discuss central bank monetary policy, Powell signaled the Fed was ready to continue tightening rates.
“The latest economic data has beaten expectations and suggests that final interest rate levels are likely to be higher than previously forecast,” he said. “If the data as a whole shows that a faster tightening is warranted, we would be ready to accelerate the pace of rate hikes.”
The last time the yield curve reversed beyond 100 basis points or 1 percentage point was 1981, for a similar situation. Fed Chairman Paul Volcker at the time was also battling soaring inflation. The recession continued and the unemployment rate soared.
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