The Yield Curve: The World’s Worst Indicator, But…

The 2-10 spread moves near inversion and markets throw a tantrum. Yield curve inversions are, in fact, a terrible indicator for both recessions and the stock market. Inversion is always early by years, and in the last three recessions, the curve un-inverted just before the business cycle peak. The steepness of the curve has no predictive power at all for either growth or equity returns. But the curve can indicate that the Fed is too tight, as Powell has testified to the Senate. The present near-inversion is due to the impact of inflation expectations imparted by the sudden collapse in oil prices, with real yields at the short-end pinned by Fed expectations. It’s not clear that the correct policy response is to pause or cut in response to this oil shock, but by Powell’s own testimony he should now be considering at least a pause at the December FOMC.