The market's most feared recession signal flashes again amid fears the Fed won't do enough to prevent an economic meltdown

Worried traderTrader Fred DeMarco works on the floor of the New York Stock Exchange.AP/Richard Drew

  • A key part of the yield curve inverted again on Thursday for the third time this month.
  • The move into negative territory came after three regional Federal Reserve presidents spoke out against lowering interest rates further.
  • The commentary reignited economic concerns, because yield-curve inversions have preceded every recession since 1950.
  • Read more on Markets Insider.

The spread between the 10-year Treasury yield and its 2-year counterpart veered into negative territory again on Thursday, inverting a key part of the yield curve for a third time this month.

The inversion came as hawkish comments from multiple regional Federal Reserve chiefs stoked fears the central bank won't take the measures required to avoid an economic recession.

Kansas City Fed President Esther George was the first to speak out against lowering interest rates in an interview Thursday, and was followed by Philadelphia Fed chief Patrick Harker. Eric Rosengren, the leader of the Boston Fed, has also spoken out against additional cuts.

Two of the Fed officials said that were not in favor of the "mid-cycle adjustment" cut in July. George told CNBC, "my sense was we've added accommodation and it wasn't required." Harker told CNBC that he went along with the rate cut with reluctance.

The dissenting opinions show the Federal Open Market Committee is divided because of the differences between global data and what they're seeing in the US economy. While the global economy is showing clear signs of deterioration and the US-China trade war is a persistent threat, stateside data is still holding up relatively well.

Yield-curve inversions have historically signaled a recession

Inversion has historically signaled that a recession is on the horizon. However, the timeline for when a recession might hit is up for debate; some analysts say the S&P 500 is on borrowed time, while others say there's no reason to worry right now.

Timing aside, the decline in Treasury yields - which took place as bond prices rose - shows that traders have grown more cautious about the economy's near-term prospects. And while the Federal Reserve reversed course by lowering its benchmark interest rate late last month, the continued slide in yields suggests more cuts may be needed to support the economy. Traders are pricing in a 94% chance of another 25-basis-point rate cut next month, according to the CME's FedWatch tool.

However, the market has no guarantees. On Thursday, the 10-year yield fell after a number of regional Federal Reserve presidents said that they do not support additional rate cuts going forward.

The ball is in the Fed's court

The question that the Fed faces is whether it's appropriate to lower rates to keep the current economic expansion - the longest on record in the US - running longer. Some, like President Donald Trump, are calling for bigger and faster rate cuts, which would juice the economy. Others think that the Fed's patience is warranted as it doesn't have a lot of room to cut in the future should things in the US turn sour.

Fed Chairman Jerome Powell will speak Friday at the Jackson Hole summit in Wyoming. He may reiterate that the Fed is willing and ready to act if necessary, said Ron Temple, the head of US equities and co-head of multi-asset investing at Lazard Asset Management.

"I would also expect Powell to try to manage the expectations of the market so that investors don't presume that we have four more rate cuts coming," Temple told Markets Insider.

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