Monetary Policy, Inflation Outlook, and Recession Probabilities
Posted: 21 Jul 2022
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Monetary Policy, Inflation Outlook, and Recession Probabilities
Monetary Policy, Inflation Outlook, and Recession Probabilities
Monetary Policy, Inflation Outlook, and Recession Probabilities
Monetary Policy, Inflation Outlook, and Recession Probabilities
Date Written: July 1, 2022
Abstract
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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