One of the leading cyclical indicators given is the spread on the 10 year T bond over the Fed Funds rate. (SS &) Based on based on earlier readings (SS 6) it appeared to me that interest rates were a slightly lagging indicator as the Fed can never time the bottom or top (case in point the last few years). What say you?
I don’t recall seeing this. was it the higher the spread, the higher the chance of an expansion? It would make sense at the monetary policy (fed funds rate) should influence the economy on a big scale
plus it would represent a higer slope in the yield curve, confirming that…
This is the crap that gets me. It doesn’t say. And I think it would depend on your view of term structure - expectations hypothesis, preferred habitat, etc I am probably going too deep here though.
florinpop Wrote: ------------------------------------------------------- > plus it would represent a higer slope in the yield > curve, confirming that… Yeah, and that would confirm an early reading that monetary and fiscal policy are both expansive. But is that really a LEADING indicator?
I think you should look at this as curve being upward sloping and forget whatever pov you have with fed funds current rate. The yield curve usually inverts before a recession and the fed is slow to the game to drop rates, or conversly the yield curve returns to upward sloping before the fed starts raising rates. I’m simplifying this, but slope would be leading and fed lagging.
Okay. Thanks Sponge.
I would say yes. because although the fed lowers interest rates as an effect of recessionary pressures, they do it to expand the economy. I think that historically the amount of monetary base in the economy has been a good leading indicator. So to sum it all up in this example lowering the fed rates is an EFFECT of a recession but a CAUSE of expansion.
Sponge that is correct but the reason that the yield curve is upward sloping is the fed rate no?
It is more an indicator of where they think rates are going in the future. Think about the recent past when the curve inverted…it predicted the recession long before the fed start cutting rates. The curve’s slope should be ahead of the fed’s moves.
That would lead me to believe it is more much to do with long term rates, which are out of the control of the Fed. Do you agree with that Sponge?
Not sure I follow you? I wouldn’t dig much deeper as you’re moving outside of the depth to know for “indicators”.
agree