US Recession Fears Rise as Fed's Preferred Bond Market Signal Hits Record Lows

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The Federal Reserve’s preferred bond market signal for a coming recession in the United States has fallen to record lows, according to new data. The research from the Fed, which compares the forward rate on Treasury bills in 18 months with the current yield on a three-month Treasury bill, has been negative since November, with the near-term forward spread now standing at almost minus 170 basis points as of Thursday. The data adds to concerns that the central bank will need to reduce rates to reinvigorate the economy. The inverted curve was the most inverted since at least 2007, according to Refinitiv data, leading to fears of a recession among investors.

The Fed has already increased interest rates by a quarter of a percentage point to tackle inflation, with forecasted borrowing costs to remain steady until the end of 2023. However, market participants believe that tighter monetary policy will hurt growth and that rate cuts will be necessary later in the year. Some Fed officials have argued for more hikes, but money market investors are betting the Fed will have cut rates by around 70 basis points by December, from the current range of 4.75%-5%. The plunge in the spread, combined with declining economic indicators and money supply, could increase the perception of a “policy error” when raising further rate hikes, according to Citi analysts.

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