Let's start by taking a look at a graph right away.
US Treasury yield curve inversion has become the longest on record. We have a key bond market signal of an upcoming recession, even if the U.S. economy is far from showing signs of a growth contraction. The part of the Treasury yield curve that points out two-year and 10-year yields has been inverted, meaning that short-term bonds yield more than longer ones since early July 2022.
Short-term bonds yield more than longer maturities because investors believe interest rates will stay high in the short term as the Federal Reserve fights inflation. At the same time, long-dated yields are lower on forecasts that the central bank will cut interest rates to support a vulnerable economy.
What happened?
Even if the curve remains deeply inverted after a sharp increase in interest rates, a recession has not appeared, and the U.S. economy continues to surprise on the upside.
US economic growth is exceeding expectations.
Under Biden, the economy has avoided a recession and is growing more quickly than projected as inflation comes down but remains sticky.
The U.S. economy is growing faster than projected, supported largely by consumer spending and the Federal Reserve’s efforts to get inflation under control without causing a recession. While inflation has come down substantially from its 9.1 percent peak in June 2022, it still remains above the Fed’s target rate. Americans’ wages are now growing faster than inflation, which should lighten some of the pressure of higher prices.
Wages are catching up with inflation.
Inflation hit its highest level since 1980 under Biden before moderating, now outpaced by wage growth.
Under Biden, unemployment reached its lowest level since 1969, and the US gained a record 7.27 million new jobs in 2021.
Job creation has remained stable since but slowed to 2.7 million in 2023.
Meanwhile, unemployment is back to pre-pandemic levels.
The stock market has also reached new record highs after growing 24 percent last year, driven by expectations that the Fed will soon cut rates.
The stock market hit new highs under Biden.
Let's get to the point. Today, interest rates are the center of attention, and we are all surrounded by sensationalist headlines preaching about rising or falling rates.
But now I ask myself: Should we worry about interest rate movements?
Let’s dig in deeper …
Keep reading with a 7-day free trial
Subscribe to Paper Alfa - Macro & More to keep reading this post and get 7 days of free access to the full post archives.