12.4% Chance Of A Double Dip Recession
That's up from 9.9% in May and 7.1% in April from the monthly Cleveland Fed analysis of yield curve spreads. It also projects 1.0% real GDP growth over the next year, much less than the consensus forecasts of just under 3%. An inverted yield curve has preceded each of the last seven recessions by about a year, but there have been two false positives, in 1995 and in 1998. How much predictive power yield curve analysis has is in dispute among economists, as the Cleveland Fed notes here.
From the report: ...other
From the report:
...other researchers have postulated that the underlying determinants of the yield spread today are materially different from the determinants that generated yield spreads during prior decades
And from P. Krugman (referenced in the report):
But here’s the thing: the Fed can’t cut rates from here, because they’re already zero. It can, however, raise rates. So the long-term rate has to be above the short-term rate, because under current conditions it’s like an option price: short rates might move up, but they can’t go down.
Indeed, if we look at Japan we find that the yield curve was positively sloped all the way through the lost decade....So sad to say, the yield curve doesn’t offer any comfort. It’s only telling us what we already know: that conventional monetary policy has literally hit bottom.
From the report: ...other
Yes. Monetary policy is a blunt instrument to begin with. With zero short-term interest rates, it is effectively limited to buying and selling assets, usually federal debt. The question here was whether the yield spread can warn us of future economic slowdowns, and there's some evidence it can, although this is far from a settled issue among the best economists.