The main part of the yield curve inverted once again on Thursday as the yield on the benchmark 10-year Treasury note traded under that of the 2-year note, the third time the recession indicator has been triggered since last Wednesday.
The move came after Kansas City Federal Reserve President Esther George and Philadelphia President Patrick Harker told CNBC they don’t see the case for additional interest rate cuts following the central’s bank quarter-point reduction in July.
Shortly after 10 a.m. ET, the yield curve turned negative and has remained that way. As of 10:19 a.m. ET the 2-year Treasury yield was at 1.601% while the 10-year yield was below it at 1.597%.
Such an inversion is viewed by many fixed-income traders as a sign of future recession, though forecasting the timing of an eventual downturn is a tougher task.
Though segments of the U.S. yield curve have inverted over the past several months, economists deem the difference between the yield of the 10-year and the 2-year notes of great importance. Inversions of that part of the curve have predated every recession over the past 50 years while the last five 2-10 inversions have all led to recessions.
George told CNBC’s Steve Liesman that her sense on monetary policy is that “we’ve added accommodation and it wasn’t required in my view.”
“With this very low unemployment rate, with wages rising, with the inflation rate staying close to the Fed’s target, I think we’re in a good place relative to the mandates that we’re asked to achieve,” George added.
The Federal Open Market Committee, the Fed’s policymaking arm, cut interest rates on July 31 thanks to “global developments ” and what it described as “muted inflation.” George, however, was one of two voting policymakers who advocated to keep rates unchanged.
Harker, not a current FOMC voting member, said the Fed should wait and see for “a while” before acting to ease rates further. George, meanwhile, is a current voting member.
Those comments — made from the Fed’s annual meeting in Jackson Hole, Wyoming — aggravated Wall Street’s fears that the Fed will be too slow to juice the economy should GDP growth contract. Though investors remained confident the central bank will cut again in September, expectations that the Fed will cut by another 25 basis points waned Thursday morning.
Traders were pricing in a 90% probability of a 25 basis point cut following Harker’s and George’s comments, according to the CME’s FedWatch Tool, down about 8 percentage points from Wednesday.
The Fed’s closely-watched annual meeting comes shortly after the central bank published minutes from its latest meeting on Wednesday.
The July minutes showed Federal Reserve officials who voted to lower interest rates three weeks ago agreed that the move shouldn’t be viewed as an indication that there is a “pre-set course” for future cuts.
Meanwhile, a reading from IHS Markit showed that the manufacturing sector was in a contraction for the first time in nearly a decade.
“Manufacturing companies continued to feel the impact of slowing global economic conditions,” Tim Moore, economics associate director at Markit, said in a statement on Thursday. “August’s survey data provides a clear signal that economic growth has continued to soften in the third quarter.”