The Fed is reducing its budget sheet which will have a significant effect on the yield curve. Inviting comparisons between the yield curve now versus any other point in history is foolish. These are probably the same people who predicted a recession when Trump was elected, after Brexit, and at least once a month for the last decade
Can you elaborate more? I'm out of my area here, but it seems like it's only foolish to say that the yield curve isn't an indicator of a possible recession if we can identify a specific mechanism that typically causes both inversions and recessions, and can also determine that that mechanism is not at play here.
Otherwise, it may be that the Fed reducing its budget sheet is irrelevant, or is a factor that is only exacerbating factors that were already at play, or even, perhaps, that short term yields exceeding long term yields actually causes recessions.
The yield curve is the most reliable predictor there is in finance. [ See a variety of links below - the first one is an overview, but the others are more research-oriented. ]
In capital markets, in order to justify taking risk, there has to be an accompanying return, otherwise people will not invest.
Inversion of the yield curve signals exactly that - returns are not enough to justify the risk, and that capital expenditures will go down, leading to lower returns, lower employment, and also a recession.
There is one key thing that very few people are talking about, however - the Fed basically controls the debt issuance, and has some (possibly even significant) ability to nudge the market in the direction it wants by buying/selling towards one end of the curve or the other.
This alone can effect the economy, but the Fed does not have a strong history here. But it's definitely possible, and I think we may experience that with the current Fed President, Jerome Powell.
What does that mean "reducing budget sheet?" Also, what is meant by long and short term interest? I thought the fed only set one universal interest target.
Short and long term interest rates in this case are for US Treasury Bonds that mature at different lengths of time. Short term bonds tend to have lower interest rates since you're taking less risk that your money will be tied up when the economy grows at a faster pace. If you invest in long term bonds and the economy hits a growth spurt, your money is stuck for a much longer period of time earning less interest than if you had invested in something other than that bond.
Edit: Missed the first question in your post. The Federal Reserve is essentially buying fewer Treasury Bonds when the bonds it currently holds matures. Instead of reinvesting the payoff + interest that it received for those bonds, it is now just taking that money and essentially keeping it out of circulation.
Mainly to prevent inflation from getting too bad. We've got very low unemployment (among those actively looking for work) and still have excess amounts of capital sloshing around combined with the tax breaks. They're trying to keep the economy growing at a steady pace instead of taking off like a rocket only to crash land later.
This confuses me a little. Many things seem to be pointing towards inflation - worsening global trade climate, high employment, knowledge that economic difficulty will be met with printing etc. But if the market expects inflation then shouldn't long term rates be higher to offset the expected inflation?
GP meant "reducing balance sheet". When the fed buys long term bonds it issues short term debt thus increasing its balance sheet and incidentally reducing long term rates. During the great financial crisis, the fed bought a lot of long term debt increasing its balance sheet to levels not seen since World War 2. It is currently in the process of reducing its balance sheet which should have the effect of increasing long term rates, but they aren't responding as much as predicted. This is why some people fear a recession.
There are many other factors, but it should be noted that this is the longest time of a financial expansion (time since the last recession) in modern history. In the 70s and early 80s there were 4 recessions in a 12 year period.
