Experts warn against recession
A nerdy recession indicator that turned red on Wednesday – and freaking out Wall Street and Main Street – could be ruined, economists say.
On Wednesday, the Dow Jones Industrial Average plunged 800 points – marking the worst fall of the year. – after a rare invasion of the Treasury market, gave bells.
But economists like Janet Yellen, former chairman of the Federal Reserve, warn that this indicator, known as the reverse yield curve, may no longer hold water. [19659002] "Historically, there has been a pretty good signal of recession, and I think that's when the markets notice it, but I really want to encourage it to be a less good signal on this occasion," Yellen told Fox Business. [1[ads1]9659002] Yellen referred to the yield on 10-year government bonds shortly below the yield on the 2-year note on Wednesday. Such inversions have accurately predicted all seven recessions over the past 50 years.
But economists warn that other factors may now play a greater role in reducing interest rates, including the European Central Bank, which distorts the bond market with its negative interest rates.
"If you live in an interconnected world, you have no choice but to import the effect of negative interest rates in Europe," Mohamed El-Erian told CNBC on Thursday.
The Fed's year of meddling to steer the economy out of the recent recession – namely keeping interest rates low and buying government securities – may also have changed how reliable bond indicators are, economists said.
“The Fed has been in the bond market deeper and longer than any comparable period. Of course, it's going to have an impact on long-term prices, explained Jared Bernstein, former chief economist and financial adviser to Vice President Joe Biden.
Also throwing cold water on the reverse yield curve as a recession predictor is research from Campbell Harvey of Duke University & # 39; s School of Business, showing that the yield curve must be inverted for a full quarter to be a true sign of a downturn, said experts.
Of course, the data also shows that inverted yield curves it triggered on Wednesday have accurately predicted slumps from 1969 to the Great Recession of 2007. The only "false positive" came in the mid-1960s, "when an inversion was followed by an economic downturn, but not an official recession, "Wells Fargo said in an April research note.
Yellen said she saw signs of a slowdown, but warned that the recession is too strong a word for today's economy. "I think the US economy has enough strength to avoid it," Yellen said when asked if the United States is in a recession.
On Thursday, investors were still faced with the fallout of Wednesday's inversion despite a dose of positive consumer data and evidence that China is taking a seemingly softer stance in its trade dispute with the United States.
The markets secured and hedged out of positive territory throughout the trading day with Dow gaining 99.97 points – or 0.4% – to close at 25,579.39. Walmart was the biggest gain for the blue-chip index, hitting 6.1% after reporting better-than-expected profits and strengthening its guidance for the rest of the year.
The S&P 500 gained 0.25% while the Nasdaq fell 0.1%.
