A key recession indicator issued its strongest warning ever on Tuesday. The inversion between 2-year and 10-year Treasury yields hit a record high of 103.5 basis points. It came after Fed Chairman Jerome Powell said rates were likely to go higher than expected. Something is loading.
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A key recession indicator sounded its strongest warning ever after Federal Reserve Chairman Jerome Powell said benchmark rates were likely to go higher than expected.
The inversion between 2-year and 10-year Treasury yields hit a record 103.5 basis points on Tuesday, according to data from Refinitiv. It then narrowed to 102.4 basis points.
In normal economic times, short-term returns are lower than long-term returns. But for months, 2- and 10-year yields have been inverted amid growing fears of recession, as the Fed continues to tighten policy to contain inflation.
The 2-year yield currently stands at 4.992% while the 10-year yield is 3.968%. Meanwhile, there is a 61.6% chance that the Fed will raise its benchmark rate by 50 basis points on March 22, from 31.4% the previous day.
Hopes of less Fed hawkishness rose briefly early in the year, when price data showed more progress on inflation. But since then, new reports have indicated that the economy and inflation remain resilient.
Beginning a two-day appearance on Capitol Hill to discuss central bank monetary policy, Powell signaled the Fed was ready to continue tightening interest rates.
“The latest economic data is stronger than expected, suggesting that the ultimate level of interest rates is likely to be higher than expected,” he said. “If all the data were to indicate that faster tightening is warranted, we would be prepared to accelerate the pace of rate hikes.”
The last time the yield curve inverted more than 100 basis points, or 1 percentage point, was in 1981, due to similar circumstances. Paul Volcker, then Fed Chairman, was also battling soaring inflation. The recession followed and the unemployment rate soared.