Yield curve inversion is a hot topic
Once in awhile the Fed does some economic research that has real-time implications for markets and that's the case with a report from the San Francisco Fed.
They took a closer took at the yield curve's predictive powers in a new paper and it's ability to predict recessions.
Most people look at the difference between 2-year and 10-year maturities to talk about the curve but there's everything from overnight rates to 30-years in the US. Today, 2s-10s are in focus because the spread hit just 18 basis points -- dangerously close to inversion.
The Fed paper looked at a variety of spreads and concluded that the best predictor of recessions is the 3-month yield to the 10-year yield. Here's the current chart:
We can see it's the flattest since the crisis but it's still at a somewhat-comfortable 77 basis points.
There is plenty of groupthink at the Fed, so expect officials to try to redirect the focus here if/when 2s10s inverts.
The San Francisco Fed also adds this note: "When interpreting the yield curve evidence, it is important to remember that the predictive relationship in the data leaves open important questions about cause and effect."
