Barron's Nonsensical Idea: Cut Rates Like Mad to Avoid Recession

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Barron's writer Matthew Klein proposes to stop the recession by cutting interest rates like it’s 1995.

Kleion says How to Avoid a Recession? Cut Interest Rates Like It’s 1995.

One of the most reliable harbingers of U.S. recession—short-term interest rates on U.S. Treasury debt higher than longer-term yields—has been flashing warning signs for months. That doesn’t mean the economy is doomed to a downturn.

So-called yield-curve inversions have preceded every U.S. downturn since the 1950s, with only one false positive in 1966. This past week, the yield on two-year Treasuries briefly surpassed the yield on 10-year notes for this first time since 2007. The most straightforward explanation is that traders...

Absurd Notion

The rest of the article is behind a paywall, but I can tell you with 100% certainly Klein's notion is absurd.

Inverted yield curves do not cause recessions. They are symptoms of a buildup of excess debt or other fundamental problems.

Those problems will not not go away if the Fed "cuts rates like 1995" or even like 2008.

If a zero percent interest rate stopped recessions, Japan would not have had a half-dozen recessions in the past decades that it did have, many without inversions.

Not even negative rates can stop recessions.

The Eurozone, especially Germany, has negative rates. Yet, it's highly likely the Eurozone is in recession now and even more likely Germany is (with the rest of the Eurozone to follow).

Monetary Madness

As a prime example of global monetary madness, witness Inverted Negative Yields in Germany and Negative Rate Mortgages.

Even if the Fed made a 100 basis point cut (four quarter point cuts at once), what the heck would that do?

Stop recession for how long? Zero months? Six months? And at what expense?

What Then?

Yes, what then? Negative mortgages? A 10-year yield of -1.0% like Switzerland.

And if that doesn't work?

Hello @M_C_Klein What then?

Central banks are the source of problems, not the cure. If central banks could stop recessions, there never would be any!

Mike "Mish" Shedlock

Comments (41)
No. 1-16
Sechel
Sechel

Seems like nobody has ever heard of Smoot-Hawley. Want to stop the world economies from imploding stop with the tariffs and quotas. A 2% Treasury is not a cure but a symptom of things gone wrong.

Sechel
Sechel

The only thing responding to lower yields are CFO's engaged in financial engineering of the balance sheet and the CDO machine. Other than that you may see a muted effect from borrowers remortgaging their homes but we've gone through so many cycles of this it won't be much

2banana
2banana

This business will get out of control. It will get out of control and we'll be lucky to live through it.

Admiral Josh Painter

shamrock
shamrock

The theory is that inverted yield curves do cause recessions because banks borrow short term and lend long term. If they can't do that profitably they then stop lending, credit stops expanding, and the economy shrinks.

hmk
hmk

The tariffs are not what is causing the yield curve to invert. TDS people would like to think so. AS I have pointed out before a 25% tariff on $600 billion of Chinese imports is an increase in costs of $150 billion out of a $20 trillion economy. Really do any of the TDS people use facts before they spout off? The yield curve is primarily inverted because there are $15 trillion in negative yields govt bonds. This drives up the price of our bonds primarily the long bonds there is an increase in demand from those fleeing negative yields. No recession in sight. Ask any business their number one problem is not enough labor particularly skilled.

cienfuegos
cienfuegos

Trump is a symptom of political sclerosis, not the cause of the disease itself...the same is true of yield curve inversion...

Greggg
Greggg

I can hardly wait to see who "THEY" blame all this on.

Augustthegreat
Augustthegreat

Trump actually could avoid a recession, by replacing Fed Chair Powell with somebody who really obeys Trump: cut the interest rate to Negative and institutes Negative rate mortgage, which will launch a new bull market on Everything.

Webej
Webej

This is completely in line with Central Bank logic. If the economy is doing well, there will be plentry of capital and interests rate will be low, but if there is adversity and natural disasters, capital will be scarcer and interest rates will rise. Economists think they can reverse cause and effect, so if there is a recession, they think you can combat it by pushing more money/credit/capital into the system.

It's like the rain. When there is enough rain, the street is wet. So if there is a drought, it is only logical to make sure the street is wet in order to make it rain. In the same way, it is completely logical to drop short term rates far enough that the yield curve on the short end will be lower than on the long end, thereby gunning the economy's engine and preempting any recession.

KidHorn
KidHorn

Yield curves lost all meaning decades ago. They reflect what the CBs are doing. Not what the economy is doing.

Blurtman
Blurtman

How far below zero would rates need to go to for a student loan to pay the entire cost of one year of college? -30% on a $100k loan? Maybe -50% if you have a low credit rating? Ka-ching!

Carl_R
Carl_R

re: Central banks are the source of problems, not the cure. If central banks could stop recessions, there never would be any!

As an actual fact, there are far less recessions and depressions now, and far less severe ones, than there were in the days prior to Central Banks. That is indisputable. The question is why? Is it because the Central Banks are marginally effective? Is it because the economy is bigger now, and thus has more momentum, making a depression less likely? Is it because the Central Bank, while it can't prevent a depression, they can postpone it, and the ultimate cost will be a much bigger, and more severe total collapse?

RonJ
RonJ

It is called a business cycle for a reason. Economies expand, then contract.

I don't recall the 1995 rate cut as cutting like mad. The FED had doubled the rate from 3 to 6%, then backed off of that some. By the end of 1996, Greenspan was complaining of irrational exuberance in the stock market. Greenspan then set up a 76% crash in the Nasdaq, with a 3/4 point rate cut in 1998.

Don_Ferreira
Don_Ferreira

Things are not that bad. The ONLY thing that the FED can do is ease policy/drop rates. If they move to drop rates further, there is just no ammunition left if and when things get tough. Right now, it just seems we should hold. I am not even sure that RAISING rates a tad would be a bad idea. Again, we are not in crisis mode, and the Fed needs to have some room to play if we need to head to the mound for a relief pitcher. If things REALLY get tough, well, I suppose we can crank up the printing press if needed, as the FED will have run out of options if rates continue to be reduced. Poor policy, and will eventually be viewed as poor planning and poor politics.

Casual_Observer
Casual_Observer

From David Rosenberg today:

If you look deep enough, the equity market is sending the same weak-growth message the bond market is flashing. The cyclically-sensitive sectors of the SPX are back in deep correction terrain, down 18% from their highs.

I was remiss in not adding the 17% plunge in CRB metals to what the yield curve and cyclically-sensitive stock market index have accomplished. If it's "no recession", then it's one rung up from that...as in, "stall speed". Either way, deflation is the primary risk.