Fed on lookout for recession but still sees strong economy: minutes | Hacker News Reader

Fed on lookout for recession but still sees strong economy: minutes

reuters.com

86 pointsiamspoilt19 comments

The yield curve has been flattening for a while now, especially for longer term (10Y, 20Y, 30Y T-Bills) securities [0, 1, 2].

As confidence in the government (i.e through a trade war) dips, as interest rate hikes become more of a reality, and as increasing amount of companies come forth with weirdly worded statements about their 'strong financials' and 'consistent growth', everyone is running for the hills.

No one needs to toot their horn when they're on a bull run, everyone can see it, and everyone is on their own run. It's only when no one can see you're having (or you will have) 'strong financials' that you need to announce it.

And it seems like you need someone to announce their strong position to keep the heard mentality of a bull run going on.

I very well might be wrong.

[0] https://fred.stlouisfed.org/series/T10Y2Y [1] https://fred.stlouisfed.org/series/DFII20 [2] https://fred.stlouisfed.org/series/DFII30

For some extra material on the yield curve, I found this via Naked Capitalism: https://wolfstreet.com/2018/07/05/as-the-yield-curve-flatten...

Sure, makes sense. When a very reliable recession indicator starts showing signs of alarm, the logical option is of course to come up with a different indicator.

An interesting, and quite a bizarre article. Thanks for pointing it out.

It'll be interesting to find out how prevalent this indicator is.

"This new indicator – rather than looking at the spread between longer-term yields of two years and 10 years – is looking at the spread between short-term yields. It’s “based on the spread between the current level of the federal funds rate and the expected federal funds rate several quarters ahead derived from futures market prices.”

- The above is weird, this indicator completely flips the focus from 'long term' outlook, to the 'QoQ' outlook. That too derived from futures market prices.

So if I can spin up some 'projects' (on a large-ish scale) that look like they'll do well for the next 6 months, I can make this graph look great. That's brilliant, we've just avoided a recession for the next 6 months.

This is kind of the same model that corporations work on. But corporations have regulations enforced on them to keep them from running into everyone with a chainsaw (EPA comes to mind).

As mentioned in an upthread comment and the posted article, the Fed outlined concrete reasons for doubting the reliability of the indicator, including QE's suppressive effect on rates. Perhaps try understanding the article you post instead of looking cursorily at the headline and deciding it looks ridiculous.

I'm not saying the Fed is definitely doing the right thing here (and neither are they, since they don't claim to be clairvoyant), but this tendency for people to feel smart by skipping considered critique in favor of "lol this sounds unintutive so it just be dumb amirite guy" is wearisome.

Per Wikipedia, the last QE ended in September of 2016. That means we’re possibly seeing the market sans those affects. Of course there’s still stimulating factors at play like the US tax cuts. Personally, I’m operating under the assumption of an impending recession to last quite a while. There are many troubling activities underway and planned.

As someone above wrote, we’re still in a weird state where the fed has a huge balance of treasuries that it wants to “normalize”, e.g. sell. I think we’re still sailing in strange waters.

Could you expand on the troubling indicators..?

A hollow economy built on debt with most of the country living paycheck to paycheck with little to no savings, no real wage raises to keep up with inflation since the 90's, doesn't sound like a 'great economy' to me. It may be a wonderful economy for the people at the top though.

https://www.cnbc.com/2017/08/24/most-americans-live-paycheck...

https://www.vox.com/cards/minimum-wage-explained/minimum-wag... (for the minimum wage vs inflation graph)

Stagnant wages and a proliferation of ways to share consumables through the “gig economy”. Just at the ground level, I see lots of new construction but I can’t point to any projects to employ more people. Then there’s the very real meddling with the US international trade posture and associated international agreements.

There has been so much fiddling with long term interest rates via QE (qualitative easing) that I am not sure how much you can look to the yield curve these days to predict anything.

Quantitative easing ended quite a while ago in the US, and I would expect that the long end of the yield curve these days is a pretty good metric for the market's expectation of long-term rates. Whether the curve has ever had predictive power is another question entirely.

I actually wrote quantitative easing - damn auto correct :)

Even though QE ended awhile ago (in the USA at least), we don't really know the long term effect of it. I would be cautious using past correlations.

Does QE end when they stop buying or does it end when they have normalized their balance sheet?

They are nowhere close to doing the latter (~$5 trillion to go):

https://fred.stlouisfed.org/series/TREAST

https://fred.stlouisfed.org/series/MBST

Returning the balance sheet to historically normal levels marks the end of the increased market participation, so I think it's the better definition.

That's a fair point, but I'd imagine one objective of normalization is to avoid moving the market in a substantial way, whereas the explicit goal of QE was to lower rates.

I woudln't expect the Fed's participation in the market at would be meaningful, especially given the fact that they've only sold ~$100B in the past 10 or so months according to those charts.

The treasury market is HUGE. (apparently > $500B ADV across all maturities)[1]

[1] https://www.sifma.org/resources/research/us-treasury-trading...

>[...] increasing amount of companies come forth with weirdly worded statements about their 'strong financials' and 'consistent growth' [...]

Is that increase your personal observation or do you have a quantitative source for it? I haven't read a lot of filings recently but the language as such doesn't seem out of the ordinary to me.

I did some research on this about 5 years ago at a former job. Unfortunately, I no longer have access to it, but the slope of the yield curve definitely had some interesting correlations with recessions.

My (incredibly simplistic) reasoning for the correlation is that as short term interest rates rise (relative to long term interest rates), investors reallocate money away from risky assets (VC / PE / Small-Cap Equities) into short term investments (Money Markets, T-Bills). And since risky assets are what really drive our economic growth IMO, we start to see a real slowdown in economic output.

While the curve has been flattening, it certainly is not flat (or inverted like it has before). I'm cautiously optimistic about the U.S. economy over the short term (1-3 years). After that, who knows.

The Fed loves to revise data retroactively, so take the following graph with a grain of salt, but they do publish a 'Probability of US Recession Predicted by Treasury Spread' [1]

[1] https://www.newyorkfed.org/medialibrary/media/research/capit...

How is the fed gonna sell off its 4.5T in assets including all the housing loans it bought, or is it somehow going to destroy them?

> is it somehow going to destroy them?

It could just hold them to maturity.

(Also, their total assets are $4.4 trillion [1], down from a $4.5 trillion peak and falling about $20 billion a month [2].)

[1] https://fred.stlouisfed.org/series/WALCL

[2] https://www.cnbc.com/amp/2018/07/05/fed-balance-sheet-runoff...

For the housing loans, the plan is to simply hold the bonds to maturity, I believe. Early (and other) repayments simply won't be reinvested.

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