“Green shoots are proliferating in gardens across America, but for some forecasters it already looks like the end of summer. A few are even hinting at recession by year-end. That’s highly unlikely.
While black swans have gained a new cachet following the prices-can’t-fall-nationwide housing bust and the financial meltdown it triggered, the most important leading indicator, the yield curve, is saying there will be no recession anytime soon.
With the Federal Reserve’s benchmark rate at zero to 0.25 percent and the 10-year Treasury note yielding 3.06 percent, the spread between the two interest rates is among the widest in history. It’s the reverse configuration, an inverted yield curve with short rates above long rates, that augurs recession.
The spread — or the “term structure of interest rates,” as it’s known in academic circles — isn’t some mystical talisman with omniscient powers. It derives its prognosticating ability from the simple fact that one rate is artificially pegged by the central bank while the other is determined by the market. Their relationship encapsulates the stance of monetary policy.
When the yield curve is steep, as it is now, it’s an inducement for banks to expand their balance sheets — borrow short, lend long — and increase the money supply. That bank credit isn’t growing now owes more to the hangover from a period of excess leverage and new-found religion on lending standards than any restrictive policy on the part of the Fed.
In a similar situation in the early 1990s, following another real-estate-driven banking crisis, it took years for financial institutions to start lending again.”
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