As the new year of 2023 begins, many economic observers are predicting a recession in the months ahead. The warning sign of a recession is an inverted yield curve, where short-term Treasury bond yields surpass long-term Treasury bond yields. This has been the case for some time, and the spread between the three-month and 10-year Treasury notes is currently the largest inversion level in four decades. The jobs market, however, does not agree. As of the January report, the U.S. is witnessing an increase in job numbers and an historically low unemployment rate. As of December 2022, the New York Federal Reserve has estimated the likelihood of a U.S. recession within the next 12 months to be 47%.
But the bond market is now signaling that the economy is not close to entering a recession anytime soon. The difference between corporate bond yields and US Treasuries, which are viewed as safe investments, can be used to measure bond investors' risk appetite. In the past few months, the difference between the yields of the bonds has decreased to a rate lower than the average seen in the years prior to 2020, a period that was generally tranquil. It is probable that this comes as a shock to certain investors, as the past year of rising interest rates and increased inflation has caused most prognosticators to anticipate an economic downturn sooner rather than later.
So, can we avoid a recession this year? It appears likely that, despite the likelihood of a short and mild recession, we may be able to avoid it. To prepare for the unexpected, an emergency fund is vital regardless of the larger economic climate. It is recommended to have an emergency fund of three to six months of expenses. Additionally, savings account holders who feel like a recession might be on the horizon can take steps to protect their funds if the value of the dollar takes a turn. By placing your money in a savings or checking account at an FDIC-insured bank or credit union, you can benefit from the federal government's safeguards. Ultimately, it's important to stay informed about the latest economic news, and understand the potential risks and rewards of investing in the current climate.
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