Aaron Blake (Washington Post) thinks that Trump is clearly scared about the economy, and he’s setting up Jerome Powell as his fall guy (with thanks to our Roving Reporter Sherry). If something goes wrong in Trump’s life, it’s always someone else’s fault. So it was with Jeff Sessions and his recusal from the Russia investigation. So it will be, Blake predicts, if the economy veers into recession, Trump and his right wing media abettors will hang it on Federal Reserve Board Chair Jerome H. Powell. Of course, a recession couldn’t be due to Trump’s ineffective tax cut and the ballooning national debt. Of course, it could not be due to Trump’s single man trade war with China that is eroding our foreign markets.
It’s possible the bigger [than the Russia investigation] threat to Trump’s presidency is now the economy, which is showing increasing signs of instability. And just as before, Trump appears genuinely worried and has found one man on which to focus his blame: Federal Reserve Board Chair Jerome H. Powell.
Powell could be in for a world of pain ahead of the 2020 election — especially if things do go south.
With the stock market tanking following Trump’s announcement of new China tariffs — amid other warning signs — the Trump administration on Tuesday gave itself a mulligan and delayed some of the more high-profile tariffs until late this year. That was the first sign there was real concern; Trump after all, had announced the tariffs less than two weeks earlier, and pulling back on them could easily be seen as a sign of weakness in his standoff with the Chinese.
That precipitated a rally in the stock market Tuesday. But then Wednesday, the inverted yield curve — which is generally acknowledged as one of the most prescient indicators of a recession — delivered more bad news. The markets fell again. [The Dow dropped about 800 points by the close of yesterday’s exchange.]
So, the Post’s Recession watch asks What is an ‘inverted yield curve’ and why does it matter?
The short answer is: “The yield curve has inverted before every U.S. recession since 1955, suggesting to some investors that an economic downturn is coming.”
Investors are spooked by a scenario known as the “inverted yield curve,” which occurs when the interest rates on short-term bonds are higher than the interest rates paid by long-term bonds. What it means is that people are so worried about the near-term future that they are piling into safer long-term investments.
In a healthy economy, bondholders typically demand to be paid more — or receive a higher “yield” — on longer-term bonds than they do for short-term bonds. That’s because longer term bonds require people to lock their money up for a greater period of time — and investors want to be compensated for that risk. In contrast, bonds that require investors to make shorter time commitments, say for three months, don’t require as much sacrifice and usually pay less.
Just think about the deposits in your bank account, which are in many ways a loan to the bank. You can withdraw that money at any time, so the bank doesn’t pay you a high interest rate. By comparison, if you lock up your money in the bank for a year or longer, you’ll get higher rates. The bond market works similarly: The longer you lend your money, the higher return you’ll get.
That would be true “in a healthy economy.”
For U.S. government securities — known as Treasury bonds — that relationship has now turned upside down. On Wednesday morning, the yield on the 10-year Treasury temporarily fell below the yield on the two-year Treasury for the first time since 2007. (It later recovered slightly.)
The [accompanying] chart shows the difference in yield between the two-year Treasury bond and Treasury bonds of other duration. Bonds of longer duration should have higher yield, but as you can see, it has dipped below for several longer-term bonds.
Other parts of the yield curve have been inverted for a few months. For instance, three-month Treasurys have been yielding more than 10-year Treasurys since late May. The gap became more dramatic Wednesday, with three-month Treasurys paying nearly 0.4 percentage points more than 10-year Treasurys as of midafternoon, greater than the 0.1 percent difference seen in late May.
The more pronounced inversion is a sign that people are more concerned about the fallout of the trade war between the U.S. and China and worried by signs that economic growth may be slowing around the globe.
All these jitters are on top of, or perhaps at the root of, economic unrest across the globe: Stocks losses deepen as a key recession warning surfaces.
Recession signals intensified Wednesday in the United States and in some of the world’s leading economies, as the damage from acrimonious trade wars is becoming increasingly apparent on multiple continents.
Two of the world’s largest economies, Germany and the United Kingdom, appear to be contracting even as the latter forges ahead with plans to leave the European Union. Growth also has slowed in China, which is in a bitter trade feud with the United States. Meanwhile, Argentina’s stock market fell nearly 50 percent earlier this week after its incumbent president was defeated by a left-wing opponent.
This [inverted yield curve], which suggests investor faith in the economy is faltering, has preceded every recession in the past 50 years.
“The stars are aligned across the curve that the economy is headed for a big fall,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “The yield curves are all crying timber that a recession is almost a reality, and investors are tripping over themselves to get out of the way.”
Whether the events presage an economic calamity or just an alarming spasm are unclear. But unlike during the Great Recession, global leaders are not working in unison to confront mounting problems and arrest the slowdown. Instead, they are increasingly at one another’s throats.
And here at home, so it goes.
… President Trump has responded by both claiming the economy is still thriving while dramatically ramping up his attacks on Federal Reserve Board Chair Jerome H. Powell, seeking to deflect blame.
It’s the latest in a string of worrisome news about the U.S. economy. The government is expected to spend roughly $1 trillion more than it brings in through revenue this year, adding to a ballooning deficit. Business investment has begun to contract — largely because of the uncertainty surrounding Trump’s trade war — and manufacturing hiring has receded. The big hiring and investment announcements that piled up at the beginning of the Trump administration have ceased, as have the announcements of bonuses and pay increases that came after a tax cut law was passed in 2017.
Speaking of getting out of the way …
Several White House officials have become concerned that the economy is weakening faster than expected, but they are not working on proactive plans to change its course. The Treasury Department has had an exodus of senior advisers in recent months, and the White House just announced a replacement for its chairman of the Council of Economic Advisers.