One of the more interesting takeaways from the Fed Chair Powell press conference is that the Fed staff no longer predicts or expects a recession in 2023. That raises the question does the Fed staff believe in its research?
For example, research from the Fed staff has shown that yield curve inversion between three-month Treasuries and the yield on the 10-year Treasury is a robust and accurate predictor of recession. After yesterday's official rate hike, the yield curve inversion stood at 150 basis points. The scale of the yield curve inversion is the widest in decades and has been for several months running, yet the Fed staff no longer expects a recession.
The Fed staff has shown that higher official rates' "lagged effects" can be very long. If the effects of higher rates are still on the horizon, why has the Fed staff raised its growth forecast?
Unfortunately, Fed Powell did not explain the change in the staff forecast. But here's one possible explanation-- -the Fed staff is starting to realize QE has caused a false signal with the yield curve, and monetary policy is more relaxed than they initially thought.
Comments