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What Is Powell’s Preferred Curve Inversion Metric Doing?

US TSYS

With general recessionary worry on the rise, we highlight the distance from inversion when it comes to Fed Chair Powell’s previously outlined gauge of choice re: Tsy curve inversion. That is the U.S. 3-month yield 18 months forward less the current 3-month yield. The spread continues to operate well clear of flat levels, which seemingly gives the Fed scope to tighten further.

  • The early rounds of Fed tightening have resulted in the spread moving from its recent peak of ~2.70% in early April (with the peak observed a couple of weeks after the first hike of the current Fed tightening cycle) to a little above 1.50% at typing.
  • Note that Chair Powell continues to stress that fighting inflation is the central bank’s priority (affirming the Fed’s stance when it comes to the trade-off between inflation and economic growth), although recent addresses have seen the Chair concede that this poses risks to economic growth, as he noted that while a soft landing is achievable, attaining such a scenario is “quite challenging” (less optimistic than he had been in previous weeks/months).
  • A Fed paper on the use of this particular yield spread can be found at this link.

Fig. 1: U.S. 3-Month Yield 18 Months Forward Less The Current 3-Month Yield (%)

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With general recessionary worry on the rise, we highlight the distance from inversion when it comes to Fed Chair Powell’s previously outlined gauge of choice re: Tsy curve inversion. That is the U.S. 3-month yield 18 months forward less the current 3-month yield. The spread continues to operate well clear of flat levels, which seemingly gives the Fed scope to tighten further.

  • The early rounds of Fed tightening have resulted in the spread moving from its recent peak of ~2.70% in early April (with the peak observed a couple of weeks after the first hike of the current Fed tightening cycle) to a little above 1.50% at typing.
  • Note that Chair Powell continues to stress that fighting inflation is the central bank’s priority (affirming the Fed’s stance when it comes to the trade-off between inflation and economic growth), although recent addresses have seen the Chair concede that this poses risks to economic growth, as he noted that while a soft landing is achievable, attaining such a scenario is “quite challenging” (less optimistic than he had been in previous weeks/months).
  • A Fed paper on the use of this particular yield spread can be found at this link.

Fig. 1: U.S. 3-Month Yield 18 Months Forward Less The Current 3-Month Yield (%)

Keep reading...Show less