Federal Reserve Board Chair Jerome Powell testifies before the Senate Committee on Banking, Housing, and Urban Affairs on 'The Semiannual Monetary Policy Report to the Congress', at Capitol Hill in Washington on Tuesday, July 17, 2018. Jose Luis Magana/AP
From the central bank's latest rate hike to new developments in the ongoing bank crisis, a lot has happened in my absence.
Jerome Powell and co. indicated Wednesday that, financial turmoil or not, more rate hikes could be coming this year.
Markets, on the other hand, expect something else entirely. Futures are pricing in a minimal chance that the Fed's target rate will be the same or higher by 2024, according to CME's FedWatch tool.
This means the Fed and investors are on dramatically different pages (and only one can be correct).
And all the while, Jerome Powell's favorite bond-market indicator is quietly telling us that a recession is all but guaranteed this year.
1. Powell's preferred Treasury indicator is the spread between the yield on three-month Treasury bills and their expected yield in 18 months' time.
On Thursday, the spread inverted by a record 134 basis points. That's steeper than the previous record set in January 2001, two months before a recession struck, Bloomberg reports.
Talk of basis points, yield spreads, and other market jargon is obscuring the key message here: Markets think a recession is guaranteed in 2023.
Remember, an inverted yield curve suggests investors see more risk in the near term. It's a classic warning for a downturn.
Here's how Powell described the indicator last year:
"Frankly, there's good research by staff in the Federal Reserve system that really says to look at the short — the first 18 months — of the yield curve. That's really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it's inverted, that means the Fed's going to cut, which means the economy is weak." READ MORE...
The economy is headed into a "Bermuda Triangle" of danger, and markets should brace for a crisis that could rival the 2008, according to economist Nouriel Roubini.
In a recent interview on the McKinsey Global Institute's "Forward Thinking" podcast, the top economist warned that the economy was risking another financial crisis as central bankers continue to tighten monetary policy.
Federal Reserve officials raised interest rates another 25 basis-points this week, and have hiked rates 475 basis-points over the last year to control inflation. That marks one of the most aggressive Fed tightening cycles in history, and could place the economy under three different kinds of stress, Roubini warned.
First, high interest rates could easily overtighten the economy into a recession, experts say, which reduces income for households and corporations.
Second, high interest rates means firms are battling higher costs of borrowing and waning liquidity, which weighs on asset prices. Last year, US stocks plunged 20% amid the Fed's rate hikes, with warnings from other market commentators of an even steeper crash in equities this year.
Finally, high interest rates are pressuring the mountain of debt, both private and public, that was amassed during the years of low rates, Roubini said. He pointed to bankrupt "zombies", which include households, corporations, and governments.
"It's got like, a Bermuda Triangle. You have a hit to your income, to your asset values, and then to the burden of financing your liabilities. And then you end up in a situation of distress if you're a highly leveraged household or business firm. And when many of them are having these problems, then you have a systemic household debt crisis like [2008]," he warned.
Roubini, one of the experts who called the 2008 subprime mortgage crisis, has repeatedly sounded the alarm for another crisis to strike the US economy. The scenario he envisions combines the worst aspects of 70s-style stagflation with something like the 2008 crisis, with a severe recession, stubborn inflation, and mounting debt levels bludgeoning economic growth. READ MORE...
