Monetary Policy, Inflation Outlook, and Recession Probabilities
Yannick Timmer and
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Francisco Vazquez-Grande: https://www.federalreserve.gov/econres/francisco-vazquez-grande.htm
No 2022-07-12, FEDS Notes from Board of Governors of the Federal Reserve System (U.S.)
An inverted yield curve—defined as an episode in which long-maturity Treasury yields fall below their short-maturity counterparts—is a powerful near-term predictor of recessions. While most previous studies focus on the predictive power of the spread between long- and short-maturity Treasury yields, Engstrom and Sharpe (2019) have recently shown that a measure of the nominal near-term forward spread (NTFS), given by the difference between the six-quarter-ahead forward Treasury yield and the current three-month Treasury bill rate, dominates long-term spreads as a leading indicator of economic activity.
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