Yield curve ignites debate on rapid rate cuts

The major rally that started in the $27 trillion bond market due to concerns that the US is gradually moving into recession has sparked discussions that the Fed should cut interest rates quickly. On Monday, the US two-year bond yield fell below the 10-year yield for the first time since 2022. This normalization in the yield curve, albeit short-term, has led to expectations of large-scale interest rate cuts in September or earlier. Economist Campbell Harvey, who draws attention to the relationship between the yield curve and growth and states that the yield curve normalized in the past four recessions, said that the Fed waited too long to take action and commented, “The Fed has now realized that it made a mistake last week.” According to Wei Li, global chief investment strategist at Blackrock, with the steepening of the yield curve, the market thinks that the Fed is behind the curve and will cut interest rates more aggressively. Fed members, on the other hand, are cautious. Chicago Fed President Austan Goolsbee said that the Fed’s job is not to react to a single employment data. San Francisco Fed President Mary Daly said the labor market was softening but avoided any reference to serious weakness. Daly said the labor data told her they should start cutting interest rates in the coming quarters. Meanwhile, the ISM services index eased recession concerns somewhat. The index, which was previously 48.8, rose to 51.4 in July, above the market expectation of 51.