3 in 3 weaver consulting
This month, Jason Weaver discusses the Federal Reserve Mandate, inverted yield curve and credit spreads.
At Weaver Consulting Group, we’ve come to know through our clients that they like to stay informed about the economy and markets, which is why we’ve come up with “3 in 3.” “3 in 3” is a monthly video series centered around three current market themes for the month with their accompanying data points. It is our goal to provide the maximum amount of value to you and your family. We hope this helps you feel more informed, which allows you to be more confident, so that you may find yourself inspired and worry free in retirement!
Federal Reserve Mandate
The Federal Reserve works to promote a strong U.S. economy. Congress directed the Fed. to conduct the nation’s monetary policy to support maximum sustainable employment, stable prices and moderate long-term interest rates. That’s defined as inflation rate about 2% and unemployment between 4.1% and 4.7%. During the great recession, unemployment peaked at about 10%. It’s been coming down ever since. Recently the Fed. has been raising interest rates as they feel more confident about the unemployment rate. Inflation bottomed out in about 2010 and since inflation is now over their 2% target, the Fed. is continuing their interest rate policy. Into 2019, they’ll continue raising rates.
Inverted Yield Curve
The inverted yield curve is when long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. The Federal Reserve wants to slow economic growth to prevent inflation. They’re pushing up short-term interest rates, which inverts the curve. This is considered a predictor of economic recessions.
The treasury yield curve inverted before the recessions of 2008, 2000, 1991 and 1981. We are getting close to inversion but we’re not there yet.
A credit spread is the difference between two bonds of similar maturity, but different credit quality. Higher quality bonds typically have less of a chance of defaulting, and offer lower interest rates. Lower quality bonds (like corporate) have a higher change of defaulting, therefore they have higher interest rates to attract investors for riskier investments.
Credit spreads widen when the U.S. Treasury markets are favored. This is typically in times of uncertainty or when economic conditions are expected to deteriorate. Widening credit spreads can act as a leading economic indicator for asset prices.
Leading in to the Great Recession, credit spreads were very tight but then they blew out in 2008 and 2009. They’ve been coming down ever since but we’ve had periods of volatility. Since they are tight right now, it tells us the economy is doing very well.
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