The recession indicator favored by the Federal Reserve has once again signaled a dangerous trend.

The Fed's preferred recession indicator has sent another warning signal. The yield on the 10-year US Treasury note fell below that on the three-month note on Wednesday, inverting the yield curve. This is usually seen as a reliable predictor of an economic downturn within the next 12 to 18 months.

The New York Fed updates the yield curve data and its recession probability forecast every month. At the end of January, the 10-year note yield was 0.31 percentage point higher than the three-month note, giving a 23 per cent probability of a recession. But the situation has deteriorated so much since then that the probability is almost certain to change. The inversion of the yield curve is seen as a recession indicator because it reflects the market's expectation that the Fed will cut interest rates in a recession.

While the market focuses on the gap between the 10-year and two-year note yields, the Fed prefers to compare with the three-month note because it is more sensitive to changes in the federal funds rate. The gap between the 10-year and two-year notes is still slightly positive, but has also narrowed significantly in recent weeks.

However, the yield curve inversion is not a perfect predictor. It also inverted in October 2022, but there was no recession for two and a half years. So while it is not certain that the economy will go into recession, investors are worried that Mr Trump's ambitious economic plans may not achieve the expected growth.

After Mr Trump's election victory, the yield on the 10-year note soared and peaked the week before his inauguration on January 20. This is usually seen as a sign of investor expectations of economic growth, but some also see it as a sign of concern about inflation and the growing debt and deficit problems in the US. Since Mr Trump took office, the yield on the 10-year note has fallen by about 0.32 percentage points, mainly because investors are worried that his tariff policies could accelerate inflation and slow economic growth.

Recent consumer and investor confidence surveys reflect growing concerns about a slowdown in economic growth and an increase in inflation. However, most of the “hard” economic data, such as consumer and labour market indicators, have remained positive even in the face of pessimism. The market currently expects the Fed to cut interest rates by at least 0.5 percentage points this year.