Trump Has It Right Again: FED Chokes Growth

Last Wednesday, the Dow Jones Industrial average fell 800 points. That’s fourth largest one day point drop ever. The drop was fueled by the fear that a recession is coming. That perception is likely wrong.

Even if the economy is slowing, it’s the Federal Reserve’s Monetary Policy that is the primary cause. Fortunately the FED has changed direction.

The trigger for the large drop in the stock market was the inverted yield curve. This happened just prior to the last seven recessions. But every time the yield curve inverts, a recession does always follow.

What is an inverted yield curve?

Because interest rates and yields reflect risk, long term rates should always be higher than short term rates, simply because the longer the bondholder’s money is invested, the more risk that is incurred. That’s a normal yield curve.

When long term rates are lower than short term rates, the yield curve has inverted.

Last Wednesday that happened.

Investors who are more uncertain today than in the past, quickly reacted to this news by selling off stocks. They believed that a recession is coming in the near future. If they are correct, corporate profits will fall and stock prices will follow.