The market doesn't set the Fed Funds Rate, the Fed does. If we were simply talking about the other yield curves I would be on board with this argument. But the Fed is in total control. Why, if the Fed was seeing a recession coming, would they raise rates? How does that make sense?
It sets the Treasury yield, though, and it usually follows the direction of Fed Funds rate changes, because higher general interest rates means loaning money to the government at low rates makes less sense unless you really don't trust the private market to pay off.
> But the Fed is in total control
No, the Fed does not set Treasury yields.
> Why, if the Fed was seeing a recession coming, would they raise rates?
Yield inversion don't tend to follow Fed rate increases, but drops in the Treasury yields which the Fed does not set. Because, again, it has nothing to do with Fed policy, it is a product of breakdown in confidence in the private market which leads to a sharp increase in the risk premium charged to private market investments by investors.
The Fed is in complete control of the Fed Funds rate. Whenever they set for the target, they hit it. Can we at least agree on that?
Look at the chart I posted above. 1969, 1973, 1979, 1989, 2000, 2006. All of these are a case of the Fed Funds rate being raised above the 30 year.
Only in 2019 do we see a Treasury yield falling into the rate, but they did snuggle up to allow that to happen.
I think you are confused because normally when people talk about the yield curve, they are looking at the 3mo-10yr treasuries. I'm not here. I'm comparing between the Fed Funds Rate and the 30 year. This is another form of a yield curve. The shortest duration to the longest duration. This curve, if the Fed wishes, never has to invert. They can always step in and react and get it to not invert. And yet, 6 months before every recession in the past 50 years, it inverted.
> Look at the chart I posted above. 1969, 1973, 1979, 1989, 2000, 2006. All of these are a case of the Fed Funds rate being raised above the 30 year.
If you chart the Fed Funds target rate (or the upper and lower limit of the target range; the data available is different at different times, because the former series was discontinued in favor of the upper/lower limit series) and zoom in, you’ll see several things:
First, the Fed did not raise target rates above the 30yr yield, it raised it near the 30yr yield, then the yield fell through.
Second, there are lots of other cases (both distant from and just prior to inversions) where the Fed raised target rates close to the 30yr yield, and (as expected) the interest rate hike just drove the 30yr yield higher. This is consistent with what I said: yield inversions happen when the market loses faith in private sector investments, increasing the risk premium relative to government debt and dropping yield on Treasuries relative to general interest rates.
The Fed Funds Rate (barring unusual perception of private market risk) and Treasury yields are both perceived as near risk free rates available to overlapping sets of investors; the law of one price suggests that as long as that unusual risk perception is absent, they should track close, and they do.
> I think you are confused because normally when people talk about the yield curve, they are looking at the 3mo-10yr treasuries. I'm not here. I'm comparing between the Fed Funds Rate and the 30 year
I think you are confused because you are looking at the effective Federal Funds rate (set by the market, but responding to changes to the target rate) instead of the target rate, and zoomed out to far. The story doesn't change much if you look at the 10yr yield (its a little different with shorter terms).
> They can always step in and react and get it to not invert.
But why would they?
There's no decent explanatory theory for any of the yield curve inversions causing a recession. There are very good theories for why they tend to be produced on the way into recessions. So they are decent recession signals, but not things you can stop a recession by preventing. (And, yes, there's a feedback argument that any known signal can be a cause, but the Fed can't visibly intervene to short-circuit that, because that intervention sends the same market signal, earlier, as the thing it seeks to prevent.)
Let's zoom in on this most recent case[0] where it was the treasury came down. We can see that there is a point where the 30 year was not only below the upper bound of the target rate, not only below the effective rate, but below the lower bound. We can see that the effective rate almost always stays within the bounds, and only moves outside of the bounds right before the Fed is about to move rates. As they give dot plots signalling that they are about to move rates, this makes sense. The market is simply smoothening out the transition.
Let's look at more yields[1]. You want to get a feel for how they work with each other. An easy way to understand it is through a dog-leash analogy. The Fed funds rate has no leash. When they move it, it moves. When they move it the 30 year does what it wants, it's a very long leash. The 3 month? It's got a short leash and therefore mostly tracks against the Fed funds rate. The 10 year is, as you can see, mostly in between those two extremes.
> There's no decent explanatory theory for any of the yield curve inversions causing a recession.
I agree with you here, that there is no economics research papers directly showing A -> B. But there was also no science showing that smoking causes cancer until decades later, and still very little science that proves that sugar causes weight gain. I'm not saying we can't trust research, but we should look at what research is being funded and by whom. Is the sugar studies funded by Kellog's and Nestle? At the very least this is a large enough topic that there should be significant negative papers being released, but I have not seen any. If you could link them, I would appreciate it.
We know what happens when the Fed brings rates up too high. We know that by not reacting during the Great Depression they made it worse. I don't think it's an unbelievable stretch to question that Fed funds above 30 year treasury causes recessions.
I'm a programmer and spend a great deal of my time trying to understand systems. I have a feel of how chaos occurs when one fundamental thing is wrong, it causes many small issues that is often very tricky to point it back to that one thing. My intuition is tingling. To me it's obvious that the Fed caused the 2008 recession by raising rates in 2006 causing the adjustable rate mortgages to default, and the housing market was simply the biggest naked swimmers, just as the S&L crisis was the biggest naked swimmers in 87. We've got naked swimmers today, and they'll be blamed once again, but it was always the Fed.
