A Federal Reserve Bank of San Francisco (FRBSF) macro economic letter discusses the Yield Curve and Recessions.

Here is the paragraph that caught my attention.

"Recently, Engstrom and Sharpe (2018) have argued that a spread of short-term Treasury rates—the difference between the six-quarters-ahead forward rate and the three-month yield (forward6q–3m)—might be preferable as a [recession] predictor because it focuses on expectations of the near-term path of monetary policy."

I do not know where the SF Fed came up with the six-quarters-ahead expectations data, but but it exactly matches a 2-year forward rate minus the current 3-month rate.

Spreads vs Recessions

Image placeholder title

Predictive Power

Image placeholder title

RECOMMENDED ARTICLES

False Signals

The problem with the idea of using forward rates as a recession indicator is the false signals they provide.

I added the two main ideas in the SF Fed letter to the spreads vs recessions chart I created the other day.

Image placeholder title

Spreads on August 27, 2018

  1. 10-Year Minus 3-Month: 0.73
  2. 10-Year Minus 2-Year: 0.19
  3. 10-Year Minus 5-Year: 0.10
  4. 10-Year Minus 7-year: 0.04
  5. 5-Year Minus 2-Year: 0.09
  6. 2-Year Forward Minus 3-Month: 0.75

The latest data for point 6 is June 29, updated July 10.

On the basis of points 1 and 6, a recession may be quite far off. Then again, there is no guarantee the yield curve inverts before a recession hits.

For further discussion of the San Francisco Fed macro letter, please see San Francisco Fed on the Predictive Power of Yield Curve Spreads.

Mike "Mish" Shedlock

Foolproof Recession Indicators

Economist Paul Kasriel at the Northern Trust has come up with a recession indicator that has called six consecutive recessions with no misses and no false positives dating back to 1962.

Coincident Economic Indicators: History Suggests Recession is Close

The Philadelphia Fed's coincident economic activity index suggests the economy is close to recession.

Fed has Recession Tools, Promises to Use them Quicker Next Time

New York Fed president John Williams is yapping today about recession tools and ability to use them quicker.

Exploring Trump's Claim of Using Tariffs to Pay Down $21 Trillion in Debt

Trump claims he will use tariffs to pay down the national debt. Let's explore the idea with pictures.

Barron's Nonsensical Idea: Cut Rates Like Mad to Avoid Recession

Barron's writer Matthew Klein proposes to stop the recession by cutting interest rates like it’s 1995.

ISM a Leading Indicator? Of What?

Here's an interesting chart from a tweet today. I cannot make heads or tails out of the proposed idea.

Exploring the "Dollar Crash" Thesis in Pictures

People have been predicting a crash in the US dollar for something like forever. Let's investigate another crash thesis.

Yield Curve and Spreads Ahead of the Fed Rate Cut Decision

Here is the final snapshot of the yield curve and spreads ahead of the first interest rate cut since 2008.

Powell Floats "Fed Will Act As Appropriate" Rate Cut Message

Powell issued a rare inter-meeting statement promising to support U.S. economy.