The founder of the market’s most famous recession indicator says the Fed overdid it with rate hikes and a downturn is still coming

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This week, bond market yields took a breather after the Federal Reserve decided to skip another rate hike. But that doesn’t mean we’ve dodged a recession, according to a Duke finance professor.

Campbell Harvey, known for creating the famous yield curve recession indicator, said a downturn may still be coming.

First, it’s because the Fed overestimated inflation and raised interest rates too much. After excluding housing costs, which are a lagging indicator that makes up a significant part of the consumer price index, inflation is already below 2%, according to Harvey.

“If you look at real-time shelter data, that means inflation is about 1.8%,” he told CNBC on Friday. “So the idea that we have a long way to go is just not the case. That’s a false narrative.”

Harvey also pointed to the flattening of the yield curve and why it is a warning sign.

Last year, the curve reversed from its usual upward slope as fears of a recession seeped through markets amid the Federal Reserve’s aggressive rate hikes.

Since then, the curve has remained inverted. But the recent flattening actually sends a new recession signal, he said, noting that the yield curve had stopped inverting just before the last four recessions.

And the way the curve is no longer inverted is especially concerning, because short-term interest rates aren’t falling, normalizing the slope. That’s because long-term interest rates are going up.

“Long-term interest rates are very damaging,” Harvey warned. ‘It increases the cost of capital, making it difficult for companies to invest. It suddenly puts pressure on the housing market with mortgages falling by 8%. This indeed has consequences for our financial system. Our banks are affected. now.”

He added: “All this points to weakness in 2024.”

Read the original article on Business Insider

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