With the discussion of the Federal Reserve and policy decisions coming back in front of the national debate these days it seems some more interest rate data would be good to review. The fiscal-monetary dynamic seems destined to be re-opened with lots of questions about the appropriate stance of policies, sequence of policies, and of course the incessant whining about policies (mostly monetary).
Yield spreads are important for a variety of well known reasons, and inverted yield curves are typically thought to be harbingers of recession (though larger context is always important). Here is the long history of the ten-year to two-year yield spread.
You cannot deny the long decline in the spread and how it seems to be heading towards a negative value, though there are clearly times when it seems to be hold off or veer away from going negative, at least temporarily. I think this makes the policy outlook all the more interesting.
Let’s take inventory of the policy issues out there. We have an issue with trade policy. While the President signaled something of a cooling off on the trade front there was then a renewed threat about increasing tariffs in the future. In all honesty there are ways you can view this as worse than actually imposing the tariffs. The uncertainty of the situation creates all types of problems for business from investment to employment.
Fiscal policy is about to get interesting. With fiscal policy the new situation with a split Congress and the possible confrontations with the White House on spending or taxing priorities could potentially paralyze policy at a time when deficits are already a problem and the outlook does not look much better.
This leaves us with monetary policy. Right now monetary policy is, to some extent, left to pick up the pieces. It seems clear that monetary policy is responding to the circumstances in the fiscal realm right now. With that and the consequences of the trade wars going on it is really unclear the extent to which policy needs to react/respond right now.
All this means that we are set up for some interesting times with policy and a need for policymakers to take careful looks at the track of the other policies and actually understand the consequences. Of course right after that cats and dogs will all start living together in harmony. But we can hope.