Economics & Growth | Monetary Policy & Inflation | US
Recession Probability Still High
- By Dalvir Mandara and Bilal Hafeez
- 2 min read
Yields have been on the rise since the Fed’s March meeting minutes were released last Wednesday. Our recession model that uses the 2s10s curve as the input is currently assigning a 50% probability of recession within the next 12 months. Indeed, the difference between 10y yields and 2y yields is currently only 19bps. Meanwhile, the Fed’s recession model, which uses the 3m10y part of the yield curve, is still only assigning a 2% probability of recession.
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).
