The Fed Is Communicating A Recession Is Imminent

Tyler Durden's picture

Authored by Chris Hamilton via Econimica blog,

The Federal Reserve is clearly and plainly telling us that it intends to take the US into recession in short order.  I'm not sure what message the markets are hearing, but the Fed is messaging two to three more rate hikes this year into (according to GDP) a sluggish and slowing economy.   The FFR (Federal Funds Rate) has been raised by 80 basis points and meanwhile the 10yr US Treasury yield has flat-lined.  At this pace, the spread (which is as near a full proof indicator of recession as we have) suggests by year end we will have recession.  Of course the Fed could halt it's likely June, September, and December rate hikes (I'm assuming 30bps each...though 50bp jumps aren't out of the question) and/or the 10yr yield could rise (but below I'll show why this is highly unlikely).  So, absent course correction, the spread on bank lending will vanish and likely turn negative by year end...and the economic impact is recession.

The spread is simply the difference of what banks borrow short, lend long, and live on the spread between the two.  The upper and lower bounds of this spread are essentially represented in the chart below by the 10yr US Treasury and the FFR (the Fed influenced overnight lending rate between the largest institutions on reserves held at the Federal Reserve).  Again, borrow short on a daily basis at near zero and lend long at near the 10yr yield.

The chart below is the spread between these two rates.  Note, when the spread is minimal or negative, recession is either underway or imminent.  Pretty much clockwork.

From 1950 to 1981, the Federal Reserve was intent on raising rates via the FFR, but to do so it had to raise the short term FFR significantly higher than the 10yr to successfully raise longer rates.  The impact of successfully pushing longer term rates higher were rate inversion and recessions.

From 1981 to present, the Federal Reserve has undertaken five rate cycles, cutting rates but subsequently only partially hiking them back up.  Each cycle cut rates deeper, held them at the cycle minimums longer, and subsequently hiked them less than previous.  But really noteworthy, is that each time the US economy went into recession before the Federal Reserve could effectively push the 10yr yield higher via it's short term FFR.  Or more simply put, the Fed's tool to hike long term rates killed the interest rate sensitive economy before a long term rate increase could be achieved.

If we take the current rate cycle (below), we can see that since the Fed began hiking the FFR (now by 80 basis points), the 10yr yield is unchanged (2.3% when the Fed began and as of now, sitting at 2.24%).  The Fed is messaging we should expect another three rate hikes this year (June, Sept, and December...assuming 30bps each).  This puts the FFR at 1.8% by December and that is where I estimate the 10yr yield to be sitting by that time.

And finally, just focusing on the FFR minus 10yr Treasury spread in this current cycle.  The chart below calls out the mileposts of rate cuts, QE's, the euphoric Trump bump, and now reality setting in (green line represents 10yr interest rates remaining at current but FFR rising...red line represents 10yr falling to 1.8% and meeting FFR at 1.8%).  As the spread nears or passes through the 0% threshold, recession is imminent.

If the Federal Reserve follows the path it is communicating, if the 10yr performs as it has for the last 4 decades, and the inverted spread indicates what it has for the last 7 decades, we will be in recession in 2018.  Why the Fed is undertaking this course is beyond me but I take my best guess HERE...but that's all you get from a middle aged, corporate washout, non-economist.  I'm sure a highly paid shill will explain why it all makes sense and there is no reason for concern.

Extra Credit - The chart below shows FFR vs. the inverted 10yr minus FFR spread from 1990 to present...once rate cuts were exhausted and could no longer be used to drive the spread, QE was used to goose the spread.  Rate hikes (balance sheet reduction???), collapsing spreads, and resultant US recession are up to the Fed.

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lester1's picture

The globalists at the Fed is raising rates going into a recession to try and fuck President Trump !!

 

Hopefully Trump signs Rand Paul's Audit the Fed bill so we can see all the behind the scenes bullshit they are doing. Yellen needs to be fired.

BigFatUglyBubble's picture

The globalists at the Fed is raising rates going into a recession to try and fuck President Trump !!

 

He's doesn't need the FED's help for that.  He's doing a good job all by himself.

 

Hopefully Trump signs Rand Paul's Audit the Fed bill so we can see all the behind the scenes bullshit they are doing. Yellen needs to be fired.

Gary Cohn: "The Fed Is Doing A Good Job"; Trump "Respects The Powers Of The Fed"
Gary Cohn, Ex-Goldman Sachs President, Chief Economic Advisor to Trump - March 2017
http://www.zerohedge.com/news/2017-03-12/gary-cohn-fed-doing-good-job-tr...

FreeShitter's picture

lol another one that doesnt get it.

BigFatUglyBubble's picture

 He left open the possibility of renominating Federal Reserve Chairwoman Janet Yellen once her tenure is up next year,

http://www.zerohedge.com/news/2017-04-12/market-turmoils-dollar-crashes-...

 

Jeff Sessions should start up reefer madness again!  Start playing those videos where the pot smoker has semen stains all over his pants, starts pulling his hair out, and jumps out the window to his death because golbins are chasing him.  We are reaching that level of madness again!  :D

evoila's picture

Trump facked himself when he started backtracking on campaign promises and attacked Syria.

He's a POS who lost my support.

FreeShitter's picture

Trump has been a bullshitting con man since the 80's.....I guess some of yall are just late to the party.

panther man's picture
panther man (not verified) FreeShitter Apr 13, 2017 7:04 AM

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sister tika's picture

I'm making over $12K a month working part time standing on street corners dressed up like Little Bo-Peep. I kept hearing other people tell me how much money they can make in the big cities, so I decided to look into it. Well, it was all true and has totally changed my life.

Giant Meteor's picture

Not to mention, I don't believe the FED really give two shits about Trump, one way or the other ...

The "FED" gives a shit about Trump, like they give a shit about me,  or the other millions of voices crying out in the wilderness, which translates to ZERO, negative numbers even ..

The FED sabotaging Trump.

Christ it's comedy central ..

Davidduke2000's picture

He does not need anybody to fuck him, he is fucking himself.

autofixer's picture

Anyone with a half-of-brain and not swept up in the emotional Trumpian vortex knew this was going to happen.  I guess Trump is not that smart after all?  Or is he part of the plan? 

BandGap's picture

"Traders", "Recession", hahahahaha!

Lots of good ones this morning.

Fuckers.

LawsofPhysics's picture

Exactly!!  Allow me to simplify this for everyone.

"Full faith and credit" ...all by design motherfuckers!!!  Still accepting fiat in exchange for your labor?

Aside from that, the casino is still open, so place your bets, just do not call this "investing", because it isn't.

Cautiously Pessimistic's picture

Wait...are they communicating an additional recession, within the current Great Recession, that really never ended?  Or is this a recession that will run concurrently with the ongoing Great Recession?  It is all so confusing!!!  Where is Admiral Ackbar to let us know if this is just another TRAP?!?

Giant Meteor's picture

That's what I have always admired about the FED, their timely calls !

Amazing how they always seem to get things jusssssss right!

Reminds me of the story of the three bears.

Someody has been eating my porridge and it's all gone !

Ooops, forgot my shout out to Goldi Locks ..

lester1's picture

Buy as much gold and silver now as you can. When this Korean war breaks out the elites will panic, gold and silver will have no bid !

FreeShitter's picture

Keep stacking for any black swan.....

Bill of Rights's picture

Correction

 

The Fed Is CREATING A Recession
FreeShitter's picture

The fed inflates and pops the bitch....the last ball buster produced QE to punish the middle class and savers...what will this one ultimately produce?

rrrr's picture

"The Fed Is CREATING A Recession"

Now you understand.

how_this_stuff_works's picture

People can't afford housing. Can't afford college. Can't afford health insurance.
Can't afford a newer car.

Losing jobs. War on the horizon.

Raising rates? Obviously the thing to do.

Giant Meteor's picture

God damned goal seeking anyway ...

Inflate or die ... being that we seem to be fresh out of greater fools, there is only one option left.

 

Megaton Jim's picture

Everyone behind the Fed is a Jew!

khaproperty's picture

Fed can change it´s communication every day. And it´s decisions as well. So what?

BurningBetty's picture

Why? Indebt the slaves then crush them as the elite continues to ascend financially.

Rich Monk's picture

So we are heading into a recession, while we are already in a DEPRESSION? You F---S!

DEMIZEN's picture

yellen to trump: no war, no qe!

Davidduke2000's picture

the central bank is late to the party, the recession has been raging since 2008 and they just noticed?? 3 month after obama, it's like when the snow melts and you see the shit that was hidden under.

trump was warned not to ride the obama fraud as all numbers were coming from different agencies of the government where fraud and fake, instead than exposing the fraud trump embraced it and believed that his bullshit will ride the market to a nirvana forgetting that what goes up must come down.

now that the fraud is getting exposed trump owns this recession and will be on his record, he will have massive debts, massive unemployment and massive hate from the voters.

moorewasthebestbond's picture

"The Fed Is Communicating A Recession Is Imminent"

 

Translation: "The Fed Is Communicating THE DEPRESSION It Can No Longer Hide Is Imminent"

baldknobber's picture

" I believe he is about to attempt re-entry"     Moonraker

brushhog's picture

That's exactly it. They can do alot to distort the market but they can't control it forever. The other shoe is dropping and they dont want to get caught out with 0 interest rates.

PS...Connery was the best Bond!

how_this_stuff_works's picture

""The Fed Is Communicating THE DEPRESSION It Can No Longer Hide Is Imminent"

You mean THE DEPRESSION it No Longer WANTS to hide.

FIFY.

Smerf's picture

This has been going on since the inflationary monetary policies of the 1960s. It's why the gold window was closed in 1971. Ever since 1913 and the creation of the Fed, the economy is based on debt creation. The establishment of the war economy enabled millions to move from rural to urban living on a permanent basis. You can't fault them for it today, because it felt like the fuckng Jetsons back then. Unfortunately it doesn't work, and makes our lives all the more precarious. We are living in a fantasy world that is not sustainable. We have to move away from a debt based system of government. Not back to gold. We have to leverage the advances we have taken in culture, science and technology to come up with a new economic model. We cannot allow the lowest common denominator to prevail. Unfortunately, I don't thnk this is something that will spontaneously happen, and nor will it occur via one elected official - as we have plainly seen with the Trumpster. This is something that will happen with a great deal of pain, and that on the other side, the people left picking up the pieces will be able to figure it out. Hopefully, there is some guy in the mountains somewhere designing a free power machine.

Stormtrooper's picture

Right.  I've got 20 chickens.  Will you barter me a cow for them?  Or, maybe it would make more sense for you to barter your cow to me for an ounce of gold.  Something you could easily barter for anything else you want.  It's what's called "money".

Peterman333's picture

they already popped the housing market, houses around me last fall were selling in a week or two or sitting now, unsold, nobody is even doing slow drive bys looking at them, they keep switching realtors thinking the one they had just didn't do  a good job trying to sell it.

DEMIZEN's picture

about dozen of houses selling on a stretch of 400 ft on my block, not a single soul interested other than scouts of millennial communes looking to rent, Most of "owners" maxed out the refi lines and probably not able to adjust the price to the new reality, so what you have is the whole hood putting the signs out and hope some random outlier will walk by and bail them out.

 

strange view it is. about 4-5 cars in front of every house and getting more.

dlfield's picture

Or...the FFR will start rising, in response.  Who knows...

Iconoclast421's picture

I love how 1985 is just conveniently ignored. Given the size of that spike, we should have had a massive recession in 1986.

Kat Daddy's picture

2016 GDP = 1.6% - 2.1% CPI 2016 = (.5) CONTRACTION!

wholy1's picture

When "the fat lady finally warbles and then wilts", it's all "said and done", the media succumbs to the reality, will it be:  the "GreatER Depression" since [about] 2007/08?  Cuz, like most other things, it's a P-R-O-C-E-S-S.

Fantasy Free Economics's picture

Again, here is another article where the Federal Reserve is treated as if there anything other than political agendas driving their activities.

Federal Reserve policy has nothing to do with economics.

http://quillian.net/blog/understanding-monetary-policy/

Honestly, the reasons the Fed does what it does are so simple that folks dismiss the simple but true motivations automatically.

James Quillian

Fantasy Free Economics

Fed-up with being Sick and Tired's picture

The most interesting comment by the Trumpster was his back-pedaling on Interest Rates and Keeping Yellen around.  SOMEONE FINALLY TOLD HIM we are FUCKED.

apike3137's picture

great...wonder if all you moonies supporting 45 are going to take the heat if the economy takes a shit after taking credit for it growing...

 

yeah that's what I thought...assholes