How the Fed Could Be Telegraphing a Recession
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What is the main topic discussed in this episode?
Your Money Briefing. Money and market stories from The Wall Street Journal. I'm J.R. Whalen in New York. The Federal Reserve projects three or maybe four interest rate increases for the year. But could the Fed be also telegraphing that the country is moving closer to recession? We'll discuss in a moment. First, these money headlines.
What does the Federal Reserve project about interest rate increases for 2018?
We're entering a period where you can expect lower stock market returns. That's the word from a Morgan Stanley research note. The note indicates that while dividend payments globally tend to be biggest in April and May, as compared with all other months of the year, June has seen historically the lowest occurrence of positive returns, while August traditionally is the year's second lowest month. And the Wall Street Journal's CFO Journal team says that businesses across the U.S.
How could the Fed's rate projections signal an increased recession risk?
are paying more attention to state taxes, which have become a larger share of their total tax liability under the new tax law. Now, while the federal corporate tax rate fell to 21%, From 35% under the federal tax overhaul, state tax rates remained unchanged. Many states are expected to lower their corporate tax rates in line with the federal reduction as a way to project a business-friendly environment. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. The Federal Reserve kicks off a two day meeting Tuesday and the central bank is widely expected to announce a quarter point interest rate increase on Wednesday. Heard on the street columnist Justin Lahar joins us to discuss whether the Fed is walking a tightrope and the risk it runs of setting off recession fears.
What headlines and market signals should investors watch this season?
So, Justin, the concern you raise in your Wall Street Journal column is that if the Fed projects four rate hikes this year, that could move potentially short-term rates higher than long-term rates, and that could set off alarms?
Yeah. So it wouldn't happen right away. But just where the Fed is going right now, they thought that the economy was going to be cooler this year than it seems like it is. They said at the end of the year, the unemployment rate would slip to 3.8 percent. And we're already at 3.8 percent. inflation is running a little bit warmer, too. So they're going to be lifting rates a little bit more aggressively than what they thought. What that means, what that should mean is that short term rates in here are going to say the two year rate is going to it should be moving higher over the next several months. Right. And then this other question is, you know, well, what does that do with the 10 year rate? Well, the 10 year rate has been sort of stuck and the two year rate has been going up.
And people get concerned when the two-year rate goes above the 10-year rate. That's what's called the yield curve inversion. We're not going to say yield curve anymore after this, but when that happens, that is often a signal of an upcoming recession.
Well, you know, many on Wall Street have seen this movie before. In fact, in 2007, those fears became reality. Last time the yield curve inverted, like when the short-term rates inched higher than the long-term rates, we were on a path to the Great Recession.
Right. And people also at that time, people said, oh, there's no signal here. It's different this time. They said that. It's different this time. There's not going to be a recession. Well, it started to invert in 2006 and it was still inverted in 2007. And then a recession happened. So, again, it seemed like it was right. And it was also we saw the same thing happen in 2000. So, again, this time, if it happens, people will say, well, this time is different.
You pointed out in your story they're saying exactly that.
Yeah. And you can understand why. They can say, well, hey, central banks bought a ton of bonds. Some central banks are still buying bonds. The Fed still has a huge balance sheet of all these bonds that it bought in response to the financial crisis. And that is affecting long-term rates and pushing them lower than where they would be otherwise. So therefore, it won't really count.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:00–0:20
2
What does the Federal Reserve project about interest rate increases for 2018?
0:20–0:46
3
How could the Fed's rate projections signal an increased recession risk?
0:46–1:33
4
What headlines and market signals should investors watch this season?
1:33–6:13
5
Why does an inverted yield curve historically predict recessions?
6:13–7:27
Speakers
2 identifiedMore from WSJ Your Money Briefing
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