Posts filed under “Federal Reserve”
A reader asked about prior studies on a flattening or inverting yield curve, wondering "what have they concluded?"
Quite a few other analysts have looked into the question. Here are two worth considering:
Bill Gross, who manages the world’s largest Bond fund — and therefore better know about this stuff – featured the chart below last month.
Gross’ conclusion? "By the time 10-year and 2-year Treasuries reach parity, as is almost
the case now, the economy is typically slowing and the Fed is at or
near the end of its tightening cycle."
Here is his relevant chart:
click for larger graphic
Courtesy of PIMco
Gross also observed that "Economists/investment managers are aware of the potency of a flattening yield curve (shown in Chart above). . . Only [former Fed Chair] Volcker, with his need to strangle inflation out of the system, persisted into negative yield curve territory for longer than a few months."
Further, I happened to come across this commentary — A Study on the Flattening Yield Curve — of post-1970 inversions.
The study’s generalized conclusions?
- Recessions have been preceded by yield curve inversions since 1970.
- lead time averages over 40 weeks.
- The S&P 500 does not do well when the yield curve is inverted (performance measured over the entire span of the inversion).
The chart accompanying that commentary shows yield curve inversions relative to the S&P500.
See the rest of the charts form various studies here.
UPDATE: December 29, 2005 1:30PM
I have made repeated references to never relying upon one lonesome single indicator, burt some of the newer reader smay have missed them. For those of you haven’t done so yet, please see Single vs. Multiple Variable Analysis in Market Forecasts . . .
UPDATE 2: December 29, 2005 3:03PM
Dave Altig of MacroBlog fame suggests NY Fed’s Arturo Estrella yield curve primer: The Yield Curve as a Leading Indicator. Its another excellent (if somewhat jargon laden) source.
Takin’ It To The Blog
PIMCo Investment Outlook, November 2005
The Federal Reserve, as expected raised interest rates for the
13th consecutive time Tuesday, lifting the federal-funds rate by a quarter
percentage point to 4.25%. The central bank suggested it would raise rates
again, but also hinted that it is less certain on its future rate actions than
it has been in over a year. In the accompanying statement, the Fed said growth
remained "solid", inflation excluding food and energy prices had "stayed
relatively low," and inflation expectations were contained. But it also warned
that the possibility of further erosion of spare productive capacity and high
energy prices "have the potential to add to inflation pressures."
economists and other analysts make of the changes? Here’s a sample of their
* * *
The Fed has finally taken the step that we have been
pointing to for a while, in separating the two concepts of reaching neutrality
and finishing the rate cycle. They kept "measured," as we thought they might,
but now it refers to "some further measured policy firming" as opposed to
removing accommodation at a measured rate. So, rather than being on automatic
pilot in raising rates toward neutral, the FOMC now sees itself in the second
stage of the rate hike cycle — further moves will be perceived by Fed officials
as taking policy toward a restrictive stance.
– Stephen Stanley, RBS
* * *
The message from the FOMC appears to be that barring a
major change in the tone of economic data, another 25bp tightening move will be
implemented at Chairman Greenspan’s last meeting on January 31. At that time, it
is quite possible that the "measured phrase" will be jettisoned, leaving
incoming Chairman Ben Bernanke with a clean slate for the next meeting on March
28. Our own view remains that the evidence concerning economic growth should be
sufficiently strong in coming months to spur another three 25bp tightening
moves, lifting the Fed funds target to 5.00% in the second quarter of the year.
We think that growth will then be moderating sufficiently for the FOMC to cease
tightening, even if core inflation drifts up mildly from its current
– Joshua Shapiro, Maria Fiorini Ramirez Inc.
* * *
The Fed announced: "Core inflation has stayed relatively
low in recent months and longer-term inflation expectations remain contained."
Quite frankly, we do not believe them. We know that beyond the rises in food and
energy prices, nearly everything — from healthcare to building materials to
education costs to insurance to commodities — costs more. And gold, the world’s
best inflation indicator, is well over $500 per ounce. Where ever we look, we
see evidence that prices have limited stability and an upward bias.
Barry Ritholtz, Maxim Group
* * *