A key indicator says a recession is guaranteed in 2023 — and Bill Ackman, Nouriel Roubini, and others are warning of trouble ahead
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Phil Rosen
Mar 24, 2023, 17:29 IST
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
Happy Friday, team. I'm Phil Rosen — after a few days cruising the Caribbean (I even spent time in Sam Bankman-Fried's old stomping grounds) it's good to be back.
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).
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."
Again, the policymakers said this week that interest rates will remain elevated through the year, although Powell did note that trouble with Silicon Valley Bank, Signature Bank, and other firms could help the Fed achieve its goals by tightening credit conditions.
"When combined with the higher cost of debt and deposits due to rising rates, consider what the impact will be on lending rates and our economy," he wrote in a tweet. "The longer this banking crisis is allowed to continue, the greater the damage to smaller banks and their ability to access low-cost capital."
"Trust and confidence are earned over many years, but can be wiped out in a few days. I fear we are heading for another train wreck. Hopefully, our regulators will get this right."
"You have a hit to your income, to your asset values, and then to the burden of financing your liabilities," he explained. "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]."
How much credence as a recession signal do you give the bond market indicator? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.
In other news:
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