Predicting recessions, depth of recessions and monetary policy pivots: a new approach

Azhar Iqbal, Sam Bullard () and Nicole Cervi ()
Additional contact information
Sam Bullard: Wells Fargo Corporate & Investment Banking
Nicole Cervi: Wells Fargo Corporate & Investment Banking

Business Economics, 2023, vol. 58, issue 4, No 5, 224-236

Abstract: Abstract We present a novel framework to predict recessions, the depth of recessions (mild or severe) and monetary policy pivots. The first phase introduces three ways to predict recessions. The first method evaluates the effectiveness of a few inverted U.S. Treasury yield curves. The second approach identifies a threshold between the federal funds rate and the 10-year Treasury yield. The final tool employs Probit modeling. The second phase of our analysis utilizes the 10-year/1-year Treasury yield spread to predict the duration of a recession. Historically, 12 consecutive months of a negative 10-year/1-year spread is associated with deeper recessions. When evaluating the tools using data going back to 1955, the 10-year/1-year spread has predicted all 10 recessions with an average lead time of 12 months. The 10-year/FFR threshold has predicted all recessions and monetary policy pivots with an average lead time of 18 months. At present, all three tools are signaling that a recession and/or Fed policy pivot is more likely than not within the next year. Through June 2023, the 10-year/1-year spread has remained negative for 12 consecutive months, which highlights the risk that an upcoming recession may not be mild. Given the historical accuracy of our framework, decision-makers may consider a possibility that the upcoming recession may be severe.

Keywords: Business cycles; Duration of recessions; Monetary policy pivots (search for similar items in EconPapers)
JEL-codes: E32 E43 E52 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/s11369-023-00338-y Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:buseco:v:58:y:2023:i:4:d:10.1057_s11369-023-00338-y

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/11369

DOI: 10.1057/s11369-023-00338-y

Access Statistics for this article

Business Economics is currently edited by Charles Steindel

More articles in Business Economics from Palgrave Macmillan, National Association for Business Economics Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().