The United States Federal Reserve’s recent decision to increase short-term interest rates is causing concern among economists and experts, as the yield on short-term bonds has significantly gone up. This move by the Fed is aimed at fighting inflation, but it has also led to the inversion of the bond yield curve, which has historically been a reliable indicator of an upcoming recession. Canadian Economist Campbell Harvey pointed out the inversion of the yield curve in the US, suggesting a possible downturn in 2025. This prediction has added to the growing apprehension about the state of the US economy.
The bond yield curve, a traditional indicator of recession in the US, has shown an inversion since July 2022, with the yield on long-term bonds lower than that of short-term bonds. This has led to fears that the US may slip into a recession in the near future. However, some experts believe that the inversion of the yield curve is not a definite sign of an impending recession. They argue that while a recession has historically followed a yield curve inversion, it takes 12-14 months for the economy to enter into a recessionary phase after the inversion occurs. Furthermore, there have been instances when the curve de-inverts, with long-term yields again exceeding those of short-term bonds, signaling a downturn.
The increased short-term interest rates by the Fed have led to the rise in the yield on short-term bonds. Analysts and experts are now expecting a rate cut in the near future to prevent the US economy from plunging into an economic downturn or recession. This sentiment is echoed by former chief investment officer of Pacific Investment Management, Bill Gross, who believes that the US Federal Reserve should consider reducing interest rates in the coming months to avoid a recession.
In conclusion, the current state of the US economy is uncertain, with the inversion of the bond yield curve and the increase in short-term interest rates causing concern among economists and experts. The potential for a recession in 2025 is a topic of intense discussion and debate within the financial community.