Yield curve in inverted is a good indicator that the bond market sees troubled times

The yield curve is an indicator that the bond market sees troubled times ahead, according to Darrell Cronk, chief investment officer for Wealth Investment Management at Wells Fargo.

Yield curve inversions, rare, are considered a good recession predictor because they suggest that investors believe that the interest rate on long-term bonds is lower than the rate on short-term bonds that economic growth is slowing.

The Federal Reserve Bank of San Francisco said that every recession in the past 60 years was preceded by an inverted yield curve.

According to Monday's Mornings with Maria, Cronk said how deep the inversion is, and that this is the deepest inversion we've had since 2000. He said that box was checked towards the risk of recession.

Cronk explained that the inversion length or duration is important, noting that the yield curve inversion was in place since the beginning of July.

He said that the bond market sees troubled times, turbulent waters ahead, and that is an indication that we are about six or seven weeks into a full inversion.

The bond market movement comes as the Fed adopts a more hawkish approach to fight inflation: Policymakers raised the benchmark interest rate by 75 basis points for the second consecutive month in July, as it tries to bring scorching-hot inflation under control. The move could cause economic growth in the U.S. to slow and exacerbate financial pressure on Americans.

The key federal funds rate is at a range of 2.25% to 2.50%, the highest since the pandemic began two years ago. It is the fourth consecutive rate increase this year.

Policymakers said in their post-meeting statement that additional increases are likely to occur in the coming months as they remain committed to returning inflation to its 2% objective. Chairman Jerome Powell said during the post-meeting press conference that another 75 basis point hike could be appropriate in the future, but that it ultimately depends on the upcoming economic data.

In July, the rapid pace of inflation slowed for the first time in months, but prices remained near the highest level in 40 years, according to a report last week.

The Labor Department said Wednesday that the consumer price index, a measure of the price for everyday goods, including gasoline, groceries and rents, rose 8.5% in July from a year ago, lower than the 9.1% year-over-year surge in June. Prices were unchanged in the one month period from June.

The Federal Reserve's attempts to cool price gains and tame consumer demand was reflected in the figures lower than the 8.7% headline figure and 0.2% monthly gain forecast by Refinitiv economists.

It was revealed last month that gross domestic product GDP dropped for the second consecutive quarter, entering the economy into a technical recession.

Cronk argued that the Fed is going to push hard on this hawkish narrative and make sure the markets are not overstating a dovish pivot. He noted that the Federal ReserveFederal Reserve is expected to release the minutes from its July meeting this week, and said that they could be a little bit of a hawkish surprise for the markets. The investment expert argued that when investors read the minutes, he doesn't believe they're going to find the dovish analogy and support that they're looking for.