Economics: Rising rates … and recession risks?

A yield curve inversion – how worried should we be?

The US yield curve has flattened aggressively this year and parts of it are now inverted. Naturally, this has spurred talk of a possible recession. But the front end of the curve will need to invert too before a recession warning is triggered.

Monetary conditions are starting to tighten sharply

Our recession dashboard also suggests that risks are not yet critical. But monetary conditions have started to tighten over the last six months. And if rates rise in line with the futures curve, this will start to exert a more meaningful drag on activity.

Fiscal consolidation increases the risk of recession

Fiscal policy is also tightening. In combination, this looks likely to act as a significant drag on activity. If the Fed ends up delivering the tightening currently discounted in the futures curve, we think a recession will become more likely than not.