Almost everyone seems convinced the bond market will give its standard recession signal in a timely fashion.
President Donald Trump has been railing against the Fed's ongoing policy of gradually raising interest rates, complaining that it's slowing US economic growth.
The spread between three-month Treasury bills and 10-year Treasury notes was 50 basis points as of Tuesday, its smallest since October 2007.
Those potential explanations aside, the US economy is in the middle of its second-longest expansion on record, and economists and investors are mindful that a downturn is inevitable.
"The market decline in the USA overnight and the flattening of the yield curve reflect that economic growth momentum is taking over as the primary concern for investors", Tai Hui, a strategist at J.P. Morgan Asset Management told clients.
As shown above, the market has a 69.6% chance of at least two more rate hikes in 2019.
However, analysts said as traders grew anxious about sagging U.S. growth, longer-dated Treasury bond yields have been sharply weighed down. A yield curve inversion preceded both the first tech bubble and the 2008 market crash.
A key economic indicator is suggesting a recession is forthcoming.
While some regional bank presidents have been explicit in arguing the Fed should hold off raising rates to avoid an inversion, the consensus has been consistent: stay the course.
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But it's worth asking why the yield curve is such an uncanny predictor of recessions (and no, it's probably not different this time).
Global equities have been shaken as a flattening US Treasury yield curve - a result of a steep fall in longer-dated yields - fanned recession jitters and as US-China trade conflict woes resurfaced after a temporary lull. But it also has not inverted, and a 10-year Treasury yields 0.50 percentage points more than a three-month Treasury bill.
Williams, a permanent voter on policy and considered among the top economists at the central bank, said in September an inversion would not be "worrisome" or a "deciding factor" in setting policy.
Wait, aren't lower interest rates a good thing?
But markets are doubtful.
The Fed has blown three major bubbles in 18 years.
A precarious situation for the Fed undoubtedly and one that I believe they will be forced to respond to with either an outright suspension of rate hikes for the next six months - potentially skipping the expected rate hike this meeting as well - or with a rate hike accompanied by very strongly worded assertions that the Fed will not raise rates again for an extended period of time and that rate hikes may themselves be in store in the very near future. Fresh projections will be issued when the Fed meets on December 18 and 19. If the spread turns negative (meaning shorter-term yields are higher than longer maturity debt), the curve is inverted...
