Fed Chair Jerome Powell was relatively dovish in his Jackson Hole speech. Does this mean a slower path of rate hikes? Not so fast?
Here is their view, courtesy of eFXdata:
Bank of America Merrill Lynch pushes back against the view that the Fed should go slow in order to avoid inverting the yield curve.
“For three reasons, we retain our view that the Fed should continue to hike at its current pace until the data object.
First, the correlation between yield curve inversion and recession does not imply causality. The more likely explanation is reverse causality, with increased worries about a possible recession causing the curve to invert.
Second, researchers from the San Francisco Fed have shown in a recent piece that the 3-month/10-year (3m10y) slope is a more reliable recession indicator than the 2y10y slope. In fact, they find that the 3m10y slope is the most accurate spread variable. We argue that this part of the curve is unlikely to invert this year and might not invert next year either, even if the Fed follows its median “dot plot” projections.
Finally, the real yield curve, which flattened substantially before the last two downturns, is steep by historical standards and has actually steepened this year,” BofAML argues.
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