The difference in the widely followed spread in 10- and 2-year Treasuries slipped to 21 basis points on Thursday (August 23), marking yet another 11-year low, based on daily data via The narrowing gap is stoking debate about whether a new recession is near and the wisdom of what’s expected to be another rate hike by the Federal Reserve next month. Based on current data, however, the economic data continues to reflect a healthy macro trend for the US. The question is whether various risks on the horizon, including a US trade war with China, will delay or even derail the central bank’s plans for higher rates?

A formal recession warning requires an inverted curve – short rates above long rates. By that measure, there’s still a margin of safety, albeit a small and fading one. Another rate hike may tip the 10-year/2-year curve into negative terrain for the first time since 2007, a year or so ahead of the start of the last recession.

Fed funds futures are pricing in a 98% probability that the central bank will lift its target rate by 25 basis points to a 2.0%-to-2.25% range, according to CME. With the 10-year/2-year spread at just 21 basis points, a quarter-point rise leaves room for wondering if the curve will invert in the near-term future.

Meantime, the effective Fed funds rate (the rate on overnight loans between banks) has recently ticked up to 1.92% and has been trading above its 30-day average for the week through August 22. That’s another sign that the central bank’s upward bias on rates prevails at the moment.

At least one policymaker is looking to keep short rates moving even higher, which suggests an inverted curve is coming. Dallas Fed President Rob Kaplan this week recommended several more rate hikes so that monetary policy is at a so-called neutral level for the economy.

“My own view is we should be raising rates until we get to neutral,” he told CNBC. “We should do it gradually. I’m not prepared to say yet I want to go above neutral.”

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