(Bloomberg) — Federal Reserve Chairman Jerome Powell, relying on the steep slope of the Treasury’s short-term yield curve to justify potential half-point rate hikes, “ignores that futures curves are deeply inverted,” indicating recession risk, according to Citigroup.
Last week, Powell hinted at a half-point hike at the Fed’s next meeting in May when the growing gap between the rate indicated a three-month Treasury bill future versus the current three-month level appeared as a signal low recession risk, Citigroup strategist Jason Williams said in a March 27 note.
“In our view, Powell is putting too much faith in the wrong yield curve” and “doesn’t see everything as clearly as he thinks,” Williams wrote. Partially based on the June 2023 to June 2024 eurodollar futures curve, which is deeply inverted, Citigroup calculates that the risk of a US recession in the next twelve months has reached 20%, compared to 9% for February.
The dislocation between the spread Powell is focusing on and the eurodollar curve is the largest since 1994, when a series of sharp Fed rate hikes was followed by cuts the following year, according to Citigroup.
The 1994 cycle “is an interesting comparison, as it ended with ‘safety cuts’ as there was no recession, yet inflation was also significantly lower than today and the Fed lagged less,” Williams wrote. “A very tight Fed, already well behind the curve, may not be able to engineer such a soft landing this time.”
Fed’s Powell is relying on the wrong yield curve, says Citi
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