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Fed Overdid Rate Hikes and Uninverting Yield Curve Means Recession Is Coming

The Fed overestimated inflation and went too far with rate hikes, Duke finance professor Campbell Harvey said.
He’s the founder of the market’s most famous recession indicator: the inverted yield curve.
Now the curve is uninverting, which happened before each of the last four recessions, Harvey told CNBC.

This week, yields in the bond market have taken a breather after the Federal Reserve decided to skip a rate hike again. But that doesn’t mean we’ve dodged a recession, according to a finance professor at Duke.

Campbell Harvey, known for creating the renowned yield curve recession indicator, said a downturn may very well still be on its way.

For one, it’s because the Fed is overestimating inflation and raised rates too much. After excluding housing costs, which are a lagging indicator that makes up a sizable chunk of the consumer price index, inflation is already below 2%, according to Harvey.

“If you look at real-time data for shelter, that means inflation is running about 1.8%,” he told CNBC on Friday. “So this idea that we still have a long way to go, that’s just not the case. That is a false narrative.”

Harvey also pointed out the flattening of the yield curve, and why it’s flashing a warning sign.

Last year, the curve inverted from its usual upward slope as recession angst seeped through markets amid the Federal Reserve’s aggressive rate hikes.

The curve has remained inverted since then. But its recent flattening is actually sending another recessionary signal, he said, noting that the yield curve uninverted just before the last four downturns.

And the way the curve has been uninverting is especially concerning because it’s not that short-term rates are coming down, normalizing the slope. It’s because long-term rates are going up.

“The long rate is very damaging,” Harvey warned. “It increases the cost of capital, so it makes it difficult for businesses to invest. It craters the housing market with mortgages all of a sudden at 8%. This causes implications in indeed in our financial system. Our banks are taking a hit right now.”

He added, “All of this points to weakness in 2024.”


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