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Economic Outlook: Difference between revisions
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== Current Economic State == | |||
== Projected Outlook == | |||
===== | === 1. Yield Curve === | ||
According to a Chicago FED research<ref>https://www.chicagofed.org/publications/chicago-fed-letter/2018/404#ftn3</ref>, the yield-curve slope becomes negative before each economic recession since the 1970s.3 That is, an “inversion” of the yield curve, in which short-maturity interest rates exceed long-maturity rates, is typically associated with a recession in the near future. | |||
In their research there are mainly two reasons driving the yield curve inversion: | |||
# If investors see higher odds of a recession, the long-term inflation risk premium in Treasury bonds will fall. In recent recessions, the risks of unexpectedly low inflation have increased relative to the risks of unexpectedly high inflation. This is explain because in periods of low inflation, the fixed nominal cash flows from a nominal bond become more attractive, driving up the prices of these bonds and lowering their interest rate. | |||
# If investors see greater risk of recession, they will attribute higher value to short-term assets that they can easily liquidate to finance spending on goods and services. Hence, they will require higher compensation, i.e., a higher RRRP, to keep holding long-term securities. This means a yield curve inversion in this escenario is an expectation of lower odds of a recession. | |||
Due to these contradictory reasons, not all yield curve inversion will signal a recession, thats why is important to understand the current enviroment we are in and the sentiment among inversions. Since several surveys has been done recently already, especially the latest Philadelphia Fed survey of professional forecasters shows the probability of a recession in the next year is the highest in the 50+ years this survey has been conducted<ref>https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q4-2022</ref>, we can conclude than this time investors are pricing in higher odds of a recession in the yield curve inversion. | |||
What is the current data telling us? | |||
== References == | |||