April 14, 2025
The real economy isn’t doing well. Investors cheered when the Federal Reserve began lowering the federal funds rate last year. But inflation is still stubbornly high, and the interest rate that matters most – the 10-year Treasury yield – isn’t cooperating.
The 10-year yield affects real-world interest rates the most. Mortgages, credit cards, and the interest companies pay when they borrow – it’s all based on the 10-year Treasury.
The 10-year yield increased to more than 4% since the Fed started cutting rates last September. So, the Fed’s rate cuts haven’t changed the minds of bond investors, who still expect bad news.
And now many reliable recession indicators are all saying the same thing: we’re headed for a recession.
The most popular is the inversion of the 2-year and 10-year yield curves. This indicator has suggested we’re in for a recession for a long time.
Also, history tells us the longer the yield curve is inverted, the harder markets crash. The yield curve was inverted for 26 months before reverting last year. That’s the longest inversion since 1929.
Another reason a recession could be especially painful is corporate and household debts are at record levels. A recession hits those with heavy debt the hardest.
On top of all that, the Fed has much less power to fight back.
So, when should we expect a recession?
Well, since 1990 we’ve experienced four recessions. Starting from the point where the Fed first started cutting rates, the economy usually falls into a recession about seven months later, on average.
The Fed started cutting rates last September. Assuming the seven-month average, the next recession would begin this month.