Does the Yield Curve Really Forecast Recession?

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stlutz
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Does the Yield Curve Really Forecast Recession?

Post by stlutz » Wed Dec 05, 2018 9:36 pm

Interesting article from the St. Louis Fed amidst all of the panic around inversion of a small piece of the yield curve:

https://research.stlouisfed.org/publica ... recession/
... an inverted yield curve does not forecast recession; instead, it forecasts the economic conditions that make recession more likely.

averagedude
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Re: Does the Yield Curve Really Forecast Recession?

Post by averagedude » Wed Dec 05, 2018 10:05 pm

Interesting that the St Louis fed thinks that an inverted yield curve doesn't predict a recession. The fed may think that, but im sure it will be something they will take into consideration when they determine to raise the fed funds rate even if the economy appears strong.

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Re: Does the Yield Curve Really Forecast Recession?

Post by AlphaLess » Wed Dec 05, 2018 10:06 pm

stlutz wrote:
Wed Dec 05, 2018 9:36 pm
Interesting article from the St. Louis Fed amidst all of the panic around inversion of a small piece of the yield curve:

https://research.stlouisfed.org/publica ... recession/
... an inverted yield curve does not forecast recession; instead, it forecasts the economic conditions that make recession more likely.
Of course. In forecasting, it is hard to be 100% right.
And also, of A forecasts conditions B, which are likely to cause C, then by transitivity, A forecasts C.
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Re: Does the Yield Curve Really Forecast Recession?

Post by RadAudit » Wed Dec 05, 2018 10:08 pm

IIRC, I remember the observation that an inverted yield curve predicted nine of the last five recessions. So, yep. It might.
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nisiprius
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Re: Does the Yield Curve Really Forecast Recession?

Post by nisiprius » Wed Dec 05, 2018 10:09 pm

So, it's a prediction of a prediction.

Daily Treasury Yield Curve Rates

Code: Select all

Date		1 Mo	2 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr	7 Yr	10 Yr	20 Yr	30 Yr
12/04/18	2.37	2.42	2.42	2.58	2.71	2.80	2.81	2.79	2.84	2.91	3.05	3.16

And given that the standard definition of an "inverted yield curve" appears to be 3 month yield > 10 year yield, and as of December 4th, those rates were 2.42% and 2.91%, there is no inverted yield curve yet, only things (like the 5 year rate being microscopically lower than the 3 year rate) that predict economic conditions that made a recession more likely.

So, a prediction of a prediction of a prediction of a recession.
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Re: Does the Yield Curve Really Forecast Recession?

Post by LadyGeek » Wed Dec 05, 2018 10:47 pm

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