The Julia La Roche Show

#137 Professor Campbell Harvey, The Inventor Of The Most Famous Recession Indicator — The Inverted Yield Curve — Sees Economic Slowdown In 2024

Jan 23, 2024

Professor Campbell Harvey, creator of the inverted yield curve, discusses the economy, the Federal Reserve, and the yield curve. He criticizes the Fed's unnecessary rate hikes in 2023 and argues for immediate rate cuts. He explains the origin of the inverted yield curve and its track record in predicting recessions. He also suggests that slower economic growth caused by the yield curve may be a positive, preventing a deep recession.

53:44

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Campbell Harvey

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Quick takeaways

Consumer savings have significantly dwindled, leading to a slowdown in economic growth in 2024.

The Federal Reserve needs to quickly cut the Fed funds rate by at least 50 basis points to counteract the negative impact of unnecessary rate hikes and achieve a soft landing with slower but manageable economic growth.

Deep dives

The Macroeconomic Outlook and Consumer Savings

Professor Campbell Harvey discusses the robust growth of the economy in 2023, driven by consumer savings and government support during the pandemic. However, he highlights that consumer savings have significantly dwindled, leading to a slowdown in economic growth in 2024. Leading indicators like delinquencies on auto loans and consumer loans suggest that consumer spending is running out of steam. Professor Harvey predicts that the second quarter of 2024 will be a key quarter to watch for signs of slower growth.

Introduction

6min

The Fed's Actions and the Economic Slowdown

17min

Real-Time Data and the Significance of the Yield Curve Indicator

2min

Building a Model to Forecast US Real GDP Growth: An Intern's Tale

3min

Using the Bond Market to Predict Economic Growth

23min

Exploring Risks and the Need for Economic Growth

4min

Professor Campbell Harvey, professor of finance at the Fuqua School of Business at Duke University and the inventor of the most famous recession indicator — the inverted yield curve — joins The Julia La Roche Show for a wide-ranging conversation on the economy, the Federal Reserve, and the yield curve.

In this episode, Professor Harvey highlights how the Federal Reserve made things worse in 2023 with its unnecessary rate hikes. According to Professor Harvey, we’re fortunate if the economy delivers slow growth this year in spite of the Fed’s damaging actions. He argues that the Fed will need to undo the damage they did with immediate rate cuts no smaller than 50 basis points at the next meeting.

Elsewhere, Professor Harvey shares the origin story of the inverted yield curve indicator and it’s 8 for 8 track record in predicting economic recessions. Now that we’re in the 9th inversion, he shares that it’s way too early to call if we’re in a false signal. He also makes a case that the inverted yield curve is causing slower economic growth, and that’s not necessarily a bad thing because you avoid a deep recession.

Links:

DeFI and the Future of Finance: https://www.amazon.com/DeFi-Future-Finance-Campbell-Harvey/dp/1119836018

https://www.fuqua.duke.edu/faculty/campbell-harvey

https://people.duke.edu/~charvey/

https://twitter.com/camharvey

0:00 Intro

1:00 Big picture macro view

1:30 Understanding the current state of the economy and the role of the consumer

5:20 Fed needs to

5:55 The story has to do with the consumer

8:30 Federal Reserve undoing the damage

10:00 Inflation, the false narrative, and policy errors