The Fed is Trapped!

The Fed is trapped! Federal Reserve Chairman Jerome Powell desperately wants to raise (short-term) interest rates to provide a cushion for the 'next time down' but he is afraid to raise rates too quickly lest he pricks the debt and stock market bubbles and leads the US economy into recession. He is also hesitant to boost short-term interest rates faster than the market has already discounted because he will invert the yield curve. Inverted yield curves (when 2 year yields > 10 year yields) ALWAYS signal a recession is not far away. Today, 2 year yields in the US have surged to 2.48%, up from just 0.60% 12 months ago, while 10-year yields have reached 2.96%. The spread between 2 and 10-year yields has narrowed to just 48 basis points. 

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Inflation in the US has started to rise, the labour market is tight, wage costs are increasing and corporate earnings are reaching new highs, yet Powell is still reluctant to raise short-term interest rates. The spread between 2-year and 10-year yields is still narrowing but a glance at the chart above suggests a turn is coming. 

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