The Treasury market is warning that a looming economic downturn may be imminent, despite a tight labour market. On Friday, benchmark 10-year Treasury yields reached 3.74%, while two-year yields increased to 4.5%, resulting in an inverted yield curve. Inverted yield curves have been known to predict economic recessions, with the market showing a lack of confidence in growth prospects in the coming years.
The most recent inversion has shown the yield on the 10-year Treasury to be 0.85% below the two-year yield, a level not seen since 1981. Some economists had recently grown more optimistic about the chances of Federal Reserve Chairman, Jerome Powell, avoiding a recession while taming inflation, thanks to a stronger than expected employment market. Last month, over 500,000 jobs were added, while unemployment rates fell to the lowest level seen in decades.
However, while the labour market remains strong, it is causing investors some concern, as Powell and other Fed officials have expressed the need for the market to cool to bring inflation back to the central bank’s target rate of 2%. “We think we are going to need to do further rate increases,” Powell said recently. “The labour market is extraordinarily strong.” As such, the Fed is expected to make a quarter percentage point hike in March, with a possible half percentage point increase for nearly one in 10 investors.
Economists from Oxford Economics say that, “We expect further Fed policy tightening as the central bank works to cool the labour market.” Annual inflation has been decreasing from a peak of above 9% in June to 6.5% in December. The consumer price index report for January is due next week, with economists predicting the headline number to drop to 6.2% for the month. However, an increase in inflation or a stagnant figure could lead to more significant rate hikes in the future, possibly resulting in a recession.
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