Recession fears have diminished now that the Federal Reserve has made three cuts to its benchmark rate and the yield curve is upward sloping again.
That’s according to economists at Wells Fargo, the nation’s largest bank lender. When the yield curve inverted earlier this year – meaning, short-term bonds were paying more than long-term bonds – it was widely viewed as a signal the economy was getting ready to contract.
“Fears about an imminent recession have faded considerably,” the Wells Fargo economists wrote in a report on Wednesday. “The Fed has shown that it will do what it takes to offset the headwinds from slower global economic growth and continued uncertainty around U.S. trade policy.”
The Fed was faced with a delicate task: Cut rates enough to stimulate a slowing economy, while preserving its firepower in case it was needed to render assistance in a more severe downturn. Economists define a recession as two consecutive quarters of GDP contraction.
Even with last year’s series of hikes in the Fed rate that put it at 2.5% in December, that’s a fraction of what prior Fed policymakers had at their disposal to stimulate the economy during previous slowdowns. In other words: The Fed didn’t have a lot of wiggle room.
“Worries about an impending recession have diminished considerably since this summer when the yield curve briefly inverted sending financial markets into a frenzy and sparking fears that this record-long business expansion was near its end,” the Wells Fargo report said.
“While data from the manufacturing sector remain weak, the overall macro data have continued to come in slightly better than expected, with job growth remaining strong and real GDP expanding at a 1.9% pace during the third quarter,” it said.