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Comment by nostromo | Hacker News Reader

The newfound obsession with the yield curve could have interesting effects on the economy.

1. The Fed now pays attention to it, so its indicator value could be dramatically weakened, or erased. (Previous Feds continued to raise rates after an inversion before previous recessions, while this Fed has done the opposite lowered them.)

or...

2. Inversions become a self-fulfilling prophecy. Despite low inflation, low unemployment, and healthy profit growth, markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession.

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Low unemployment is not a useful metric for 2 reasons. First is it does not account for people who have dropped out of participating in the labour market. Second is the race to the bottom in many industries. The uberisation of everything is driving income inequality. Eventually if you stop watering the plants they stop bearing fruit. Our economy is all fruit (ie complex financial instruments generating even more dollars for rich people by moving money around) no water (livable income for the masses) these days.

> First is it does not account for people who have dropped out of participating in the labour market

There are alternative measures to U3 (the official unemployment rate). The U5 and U6 measures of unemployment are designed to capture discouraged workers.

Plus, all of the published rates are extremely highly correlated. It can be hard to agree on what number is "right", but when one rate is relatively low, so are all the other rates.

Sophisticated investors and the Fed have been paying attention to yield curve inversions for a while.

But they also look at heaps of other data like manufacturing indices which is one of the first signs of a coming slow down.

I would not expect a slowdown in manufacturing to be detrimental to the US because Microsoft, Visa, and Facebook do not make physical things. Much of the US economy's value is in IP.

Good news then! The Non-manufacturing index is also down.

It's been known since at least the 80's. It's not newfound. Perhaps the retail investor is more aware of it.

Can you link me to something on that? I'm genuinely curious.

The research I've seen all stems from the original paper, published in the late 90s. (And it took two recessions for it to be taken seriously as a recession indicator.)

The yield curve is built into all assets - that's how you discount future stock earnings to derive present value. An inversion roughly means that the curve was wrong, i.e. the market was overly optimistic about how low the interest rates are going to be.

> Campbell R. Harvey's 1986 dissertation[4] showed that an inverted yield curve accurately forecasts U.S. recessions.

https://en.m.wikipedia.org/wiki/Yield_curve

> markets decline due to the assumption that the yield curve inversion is a perfect forward indicator of recession.

I don't think you are saying it is, just that the markets believe it is, but the funny thing is that it's not a perfect predictor of an oncoming recession.

While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession.

>While all our recent major market down turns have been preceded by a yield curve inversion, there have been plenty of times that the yield curve inverted and was not preceded by a recession.

I thought it only inverted once without a recession in the following 30 months.

"The U.S. Treasury yield curve has inverted before each recession in the past 50 years and has only offered a false signal just once in that time, according to data from Reuters." https://www.cnbc.com/2019/03/25/the-us-bond-yield-curve-has-...

The yield curve is an indicator of institutional investor expectations. There are other economic indicators that would cause them to be more bearish on bonds.

There is no "newfound obsession" with it. If you think about what it means, you cannot have a healthy economy with a prolonged inverted yield curve.

do you have a source that the fed used this metric as a reason for lowering rates?

Just go read the Fed's meeting notes.

> Several participants also noted that the slope of the Treasury yield curve was unusually flat by historical standards, which in the past had often been associated with a deterioration in future macroeconomic performance.

https://www.federalreserve.gov/monetarypolicy/fomcminutes201...

(I don't think the latest notes have been released yet, so these are from earlier this year.)

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