Economics & Growth | Monetary Policy & Inflation | US
Recession Probability Stays Close to 70%
- By Dalvir Mandara and Bilal Hafeez
- 2 min read
Short end yields have nudged higher ahead of this week’s Fed Policy meeting with 2Y yields up 20bps over the past 30 days compared to that of 10Y yields which are down 26bps. Additionally, 3M yields are still soaring – they are now up 116bps over the past 30 days which has flattened the slope of the 3M10Y curve considerably. The odds of recession in our model (and the Fed’s) rise with curve inversion.
Our recession model, which uses the 2Y10Y part of the yield curve, still assigns a 69% 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 over 16% chance of recession (Chart 2).
Background to Models
We introduced two models for predicting US recessions using the slope of the US 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. Our model is based on the 2s10s curve compared to a model from the Fed that is based on 3M10Y curve. We believe that the 2Y better captures expectations for Fed hikes in coming years and is therefore more forward-looking.
