Despite the recent steep inversion of the Treasury yield curve, the U.S. economy could see a significant drop in inflation without entering a recession, according to Bank of America.
What Happened: The bank’s strategists pointed to the inverted 2-year and 10-year Treasury yield curve, a well-known recession gauge, which recently steepened to a full percentage point, marking the steepest inversion in over 40 years, Business Insider reports.
However, this time, the indicator is signaling a hard landing for inflation, not for the economy. The bank sees the U.S. economy avoiding a steep downturn, with forward real yields indicating a modest drop over the short term.
Why It Matters: This development comes as the Federal Reserve has been aggressively raising interest rates to control inflation, a move that could potentially tip the economy into recession.
The current rates are at their highest level since 2007, with more hikes expected later this year. The New York Fed has priced in a 71% chance the economy will enter a recession by next year. However, the Bank of America’s analysis suggests that the economy could avoid a steep downturn, a view that aligns with some experts’ opinions, as earlier reported by Benzinga.
Investors have been eyeing a potential recession for the past year. Markets are pricing in an 87% chance the Fed will hike rates another 25 basis points at their July policy meeting, a move that would lift the Fed funds rate target to 5.25-5.5%.
“Curve inversion at historically extreme levels does not currently reflect elevated recession risk, but instead is largely related to expectations for cuts alongside inflation converging to target,” Bank of America strategists said, according to the Insider.
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