Is the US heading for a recession? There’s more to it than an inverted yield curve

Some investors fear the US economy is stalling, which could see the end of the equity market bull run

However, not only are there doubts about the yield curve’s ability to accurately predict a downturn, other indicators that monitor US recession risk remain healthy

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A worker organises food at the West Alabama Food Bank in Northport, Alabama, on March 28. Inflation is driving up operating costs for food banks and pantries across the US and forcing them to ration their aid, but there are fears the Federal Reserve’s attempts to rein in inflation could lead to a recession. Photo: Bloomberg

Tai Hui

Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management.

Published: 1:30am, 9 Apr 2022

The US Federal Reserve increased interest rates at its March Federal Open Market Committee meeting, as well as its forecasts for inflation and policy rates. Senior officials have, since then, indicated that the focus will be on tackling inflation.

The market now expects a 50 basis point rate increase at the Fed’s next meeting in early May. This has heightened market concerns that aggressive policy tightening will not only reduce inflation but also economic growth.

The US Treasury yield curve has flattened significantly. By early April, the two-year bond yield was higher than the 10-year yield, a phenomenon known as an inverted yield curve. Historically, investors have seen this as a warning sign of slowing growth or even recession.

Given the inverted yield curve, some investors are sounding the alarm about the US economy stalling, which could bring the equity market bull run to an end. However, there’s no cause for panic. Not only are there doubts about the ability of the yield curve to accurately predict recessions, an inverted curve does not necessarily point towards an imminent downturn or equities bear market.