Fed Causes a Recession

Quick Overview

The video argues that the current inversion of the 10-year minus 2-year Treasury yield curve, currently at a 0.46% spread, does not guarantee an immediate recession or bear market because the historical correlation is not perfect, especially regarding the timing of the yield curve steepening after inversion and the actual start of recessions or market downturns.

Key Points: The current 10-year minus 2-year Treasury yield spread is 0.46%, indicating a normal yield curve shape after a period of inversion. Historically, the Fed cutting rates (short-term yields falling) often correlates with recessions, but the recent 2022-2023 inversion was not followed by a technical recession (two consecutive quarters of negative GDP) in 2022 or 2023. Historical analysis of the 10-2 spread shows that inversions have preceded every US recession since the late 1980s, with an average lag time of about 15 months. The 2022-2023 inversion was followed by the yield curve un-inverting and steepening, which historically precedes recessions, but the resulting GDP decline in Q1 2025 (-0.6%) was very slight compared to historical recessions. The S&P 500 chart shows that bear markets (like the 2000 dot-com bust and 2008 Great Financial Crisis) often correlate with recessions, but bear markets also occurred without official recessions, such as in early 2020 and early 2022. The speaker cautions against relying solely on the two-quarter negative GDP definition for recession, emphasizing that the yield curve inversion/steepening timing is imperfect for predicting market tops, as evidenced by historical data where bear markets started before or after the inversion/un-inversion event.

Context: The video analyzes the significance of the US Treasury yield curve, specifically the spread between the 10-year and 2-year constant maturity yields, which has recently un-inverted after a prolonged period below zero (inversion). An inverted yield curve is traditionally seen as a highly reliable predictor of an impending recession and subsequent bear market, as investors demand higher returns for holding shorter-term debt than longer-term debt due to expectations of future economic weakness and Fed rate cuts. The speaker contrasts this historical signal with recent economic data, particularly the 2022-2023 inversion, to assess the current risk.