Investors who are predicting a recession based on the yield curve are focusing on the wrong indicator.

The yield curve between the two-year and 10-year Treasurys is being closely watched, but investors are focusing on the incorrect signal.

The Federal Reserve's studies on the yield curve do not consider it to be inverted until the yield on the three-month T-bill is above that of the 10-year note, as previously noted.

Although the curve is mostly flat between two-year and 10-year maturities, this is not the primary metric the Fed closely monitors.

If the Fed increases short rates more aggressively, the gap between the three-month bill and the 10-year note may approach inversion sooner.

On average, the period between a full inversion and a recession is approximately 12 months.

We have some time before we need to worry about a recession.

Today’s real-time economic reactions to Fed policy

For some time, I have been pondering about another interest rate concern.

Despite the current fast-paced world, economists maintain that there is still a considerable delay between the implementation of Fed policy and its impact on the economy.

I doubt that to be true in today’s world.

In 1984, when I began my career in business journalism, it was widely accepted that there was a time delay between policy implementations and their corresponding economic effects.

Until recently, the Fed only acknowledged policy changes through a news release with minimal information.

In that era, daily tracking of the Fed's open market actions became necessary for the legion of "Fed watchers."

The Fed would temporarily add or drain liquidity from the banking system at around 11:30 a.m. ET each day to address cash imbalances.

Changes in policy may not be confirmed until permanent additions or subtractions are made.

The size of the money supply was monitored by fed watchers, who tracked any increases or decreases in the figures released every Thursday afternoon.

It took weeks or even months for some consumer rates to change and affect markets, consumer spending, and savings patterns after anyone discovered that the policy had been altered.

The Fed discloses updates in real-time, responds to reporters' inquiries regarding its decisions, and shares information between meetings to inform markets and consumers of any upcoming changes in the central bank's thinking.

That has an immediate impact on the economy.

In the 1980s, several interest rates were used to determine mortgages, including the 11th District Cost of Funds.

The mortgage rate fluctuations were not immediately affected by changes in Fed policy due to the monthly update of that rate.

Today, you can see daily changes in mortgage rates online.

Consumers react to tighter policy

In recent weeks, both pending and existing home sales, as well as mortgage applications, have decreased due to the anticipation of larger and more frequent rate hikes in 2022, with only one announced change in rates.

The Fed should consider the strong economy and rising inflation as key factors in normalizing rates, but the speed at which policy affects the economy suggests that the Fed should approach rate hikes and balance sheet reductions with caution.

If fiscal policy is now focused on deficit reduction, a near-simultaneous tightening of monetary policy could lead to a recession, especially considering the other risks facing the economy, such as the ongoing war in Ukraine, renewed Covid lockdowns in China, and restrictions in Hong Kong.

While many critics have criticized the Fed's policy, few have pointed out that the real issue may be whether the curve now resembles a fastball.

The Fed's fastballs pose a significant threat to the economy, despite the importance of addressing the curve.