Anxiety about the slowing economy and weakness overseas have stoked fresh concerns, but the Fed’s newfound flexibility and expectations for continued growth at home remain a tailwind for shares.

The yield curve plots yields on Treasury bonds with various maturities, typically 1 month to 30 years. Normally, yields rise as the maturity lengthens.

Recessions have historically been preceded by an inverted yield curve, i.e., the shorter-dated maturities yield more than the longer-dated maturities.

• On March 22^nd, the yield on the 3-month T-Bill exceed the yield on the 10-year by 0.02 percentage points: 2.46% vs 2.44% (US Treasury Dept).
• It’s the first time this has happened since 2006 (St. Louis Fed).

We’ve had seven recessions since the 1969-70 recession (NBER). All were preceded by an inversion. A recession ensued an average of 11 months later.

Wednesday’s Fed meeting had four big takeaways. The Fed is projecting no rate hikes this year, down from two at the December meeting. And the Fed will end the runoff of its balance sheet in September, a little earlier than most had anticipated. The dovish tilt that began in January continues.

In addition, the Fed kept its key rate at 2.25-2.50% as expected. Finally, Fed Chief Jerome Powell says he expects “solid growth” this year, though the Fed downgraded the economic outlook.

While the Fed says it wants to maintain today’s rates, investors are trying to sniff out a rate cut this year amid the slowdown in the global economy and its possible impact at home.

Take a look at Figure 1. As of March 22, investors were pricing in more than a 50% chance of at least one rate cut this year and a 43.7% chance rates will remain unchanged.

The Federal Reserve’s meeting concludes Wednesday. Virtually no one sees a rate increase from the current fed funds rate of 2.25 -2.50%.

On the radar—

• Language in the Fed’s statement
• Projections for the fed funds rate at year end
• The endgame for the balance sheet runoff