If you’re a longer term reader of mine, you know that I’ve written extensively about the possibility of a recession. One of the main economic indicators that has predicted all of the recessions we’ve had in the past 60 years was an inequity between short and long term bond rates,
Please understand that bonds are priced based on risk. If shorter term two year bonds are priced higher than longer term 10 year bonds, what does it mean?
Simply that traders are expecting more problems in the next two years than they’re expecting in the next decade. And that’s how the bond markets have been trading for the past year.
But if you look at the prices on Treasury Notes today, they’re moving in the right direction. Since we’re not in a recession, that tells me that the economy may actually be doing something historic.
We might have a front row seat for the unicorn of all economies; An Ever-Elusive Soft Landing. This is when the Fed gets inflation under control without the economy going into a recession.
In addition to the inequity in bond rates correcting, the following economic indicators have also occurred…
1 – Economic growth in the first half of the year was solid at 2.8
2 – Businesses are continuing to invest in order to expand and increase growth
3 – Consumers haven’t cut back their spending
4 – Inflation is down
In the past 60 years, we’ve only had one other instance where the Fed was actually able to pull off a soft landing. That was back in 1994 – 1995.
Normally, when the Fed is forced to slow the economy by raising interest rates and restricting monetary policy, they wait too long. By keeping interest rates too high for too long, they force the economy into a recession.
But let’s remember that they did something different this time. They raised interest rates much faster. This was a historic change that had never been done before.
In prior difficult economies, they raised interest rates a quarter of a point at a time. This means that it took years for them to get the rate up to where they needed it in order to slow things down.
But this time they raised the rates in about eighteen months.
The Fed will be meeting shortly to discuss their interest rate policies. Their biggest concern is dropping them too quickly.
Back in the 1970’s that’s what happened. They dropped the interest rates too quickly without actually having inflation under control, and inflation popped back up.
This forced them to bump the rates back up to get inflation back under control. It also prolonged the pain.
Most economists think they’ll keep their rates steady for now and will begin dropping them at their September meeting. But only time will tell.
Again, we may have a front row seat as a unicorn comes into view.
Let me leave you with this…
Take it easy my Brothers and Sisters. We’re not there yet. There’s only a million things that could possibly go wrong between now and the finish line.
Many of you have put projects on hold not trusting an uneasy economy. Others haven’t moved forward with purchases because borrowing rates are too high.
But here’s the good news. The end is in sight.
Please realise that caution is still the order of the day. It could still go either way.
If the Fed waits too long, we could still see a recession. If they move too quickly, inflation could rear its ugly head once again. At that point they’d again need to raise rates and we’d all be back in the soup once a second time.
Be patient. We still don’t know where things are going to land.
No one wants to begin a project and get into the middle of it, when the economy drops out from under you.
We’re all going to get through this. Let’s get through it together.
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Chris Amundson
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