Bond markets are signaling recession through the inverted yield curve, but Bahuguna said other factors come into play in trying to determine if a recession is really on the horizon.
“In the past, yield curve inversions have correctly predicted recessions because the Fed has continued to tighten even after an inversion. That is unlikely to be the case now,” Bahuguna said. “The Fed has already cut interest rates once and has communicated the willingness to do more cuts if warranted. It is quite likely that in the face of more market volatility as a result of trade issues, the Fed will cut rates further.”
In this case, the trade wars, if they are not resolved, may trump actions by the Federal Reserve, she warned. “Lower rates by themselves are not likely to spur hiring and generate growth. We need both monetary easing and de-escalation of trade tensions for the economic expansion to continue.”