Monetary Policy, Inflation Outlook, and Recession Probabilities

Posted: 21 Jul 2022

See all articles by Andrea Ajello

Andrea Ajello

Board of Governors of the Federal Reserve System

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department

Makena Schwinn

Independent

Yannick Timmer

International Monetary Fund (IMF) - Research Department; Board of Governors of the Federal Reserve System

Francisco Vazquez-Grande

Board of Governors of the Federal Reserve System

Multiple version iconThere are 4 versions of this paper

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.

Suggested Citation

Ajello, Andrea and Benzoni, Luca and Schwinn, Makena and Timmer, Yannick and Vazquez-Grande, Francisco, Monetary Policy, Inflation Outlook, and Recession Probabilities (July 1, 2022). FEDS Notes No. 2022-07-12, Available at SSRN: https://ssrn.com/abstract=4168488 or http://dx.doi.org/10.17016/2380-7172.3175

Andrea Ajello (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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HOME PAGE: http://sites.google.com/site/ajelloandrea/

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-8499 (Phone)

HOME PAGE: http://lbenzoni.frbchi.googlepages.com/

Makena Schwinn

Independent

Yannick Timmer

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Francisco Vazquez-Grande

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-973-7488 (Phone)

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