There are clear signs that U.S. economic activity has been decelerating lately. That, coupled with a potential inversion of the yield curve has made investors concerned about an upcoming recession. Numerous analysts claim that diverse structural factors that are keeping long dated yields low for a protracted period of time, as well as the extensive use of unconventional monetary policy tools, are making the term spread’s signal less powerful and accurate than in the past. As a result, they have been advocating that inversion should be dismissed as a major economic concern. We continue to stress that in general it would be too rash to ignore an indicator like the yield curve. If the use of quantitative easing programs has indeed distorted the term spread’s signal, then short-term rates should be adjusted to account for both quantitative easing and tightening, and the probability of a U.S. recession should be determined using the adjusted spread. The report provides useful insights on the probability of recession using the term spread, as well as an adjusted version to account of QE and QT.
Macro Analysis /United States of America
The odds of a U.S. recession hit their highest level 2007!
15 June 2019