Economics & Growth | Monetary Policy & Inflation | US
Recession Odds Are Still High
- By Dalvir Mandara and Bilal Hafeez
- 2 min read
Rises in short term yields continue to outpace that of longer-term yields. The yield on the 2y is up 38bps over the past 30 days compared to 22bps for the 10y. A combination of the two has kept the slope of the 2s10s curve flat which has led to the odds of a recession remaining above 50% for over 2 weeks now.
Our recession model, which uses the 2Y10Y part of the yield curve, currently assigns a 54% chance of recession within the next twelve months (Chart 1 and 3). Meanwhile, the Fed’s recession model, which uses the 3M10Y part of the yield curve, produces just a 5% chance of recession (Chart 2).
Background to Models
We introduced two models for predicting US recessions using the slope of the yield curve. When long-term yields start to fall towards or below short-term yields, the curve flattens or inverts. This has often predicted a recession in subsequent months. One model from the Fed is based on the 3m10y curve and the second is our modified version based on the 2y10y curve. The two-year would better capture expectations for Fed hikes in coming years. It is therefore more forward-looking. So, our preferred yield curve is the 2y10y curve (10-year yields minus two-year yields).
