near-term forward spread (Chart: Bloomberg)

A gauge of U.S. economic health closely watched by the Federal Reserve is flashing warning signs for the second time this year.

The near-term forward spread, which reflects the difference between the forward rate implied by Treasury bills six quarters from now and the current three-month yield, fell back below zero on Friday for the first time since January. While it’s since edged back into positive territory, a negative reading indicates market expectations of monetary policy easing during the next 12 to 18 months.

Its last foray below zero marked the first time that’s happened in a decade, and preceded Chairman Jerome Powell’s signals that the central bank was in no rush to hike interest rates.

“The near-term forward spread is a guide on how the market perceives Fed policy,” said Gary Kirk, a partner and portfolio manager at TwentyFour Asset Management LLP in London. “Despite the dot-plots, the market is currently expecting a rate cut in 2020.”

The Fed has referenced the gauge more frequently in its policy deliberations since economists highlighted its power in predicting recessions in July last year. The central bank’s rate-setting committee noted in minutes from its January meeting that the spread “was in the lower end of its historical distribution” during the month.

Traders watch yield-curve implied measures closely to provide early warning signs of U.S. economic health. The decline in the near-term forward spread comes after disappointing Chinese trade data released on Friday and dialed-back growth forecasts from the European Central Bank and the OECD earlier in the week.

Whether the Fed sparks fear of a policy error from any further rate increases is “a classic late-cycle conundrum,” said Kirk.

The spread between the two-year and 10-year Treasury note, another closely watched indicator known for its power in predicting recessions, remains in positive territory but is trading close to levels last seen in 2007. A Federal Reserve paper from July argued that the near-term forward spread was a more statistically-meaningful indicator.