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The yield curve as
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As
a member of the
research staff at the Federal Reserve Bank of New York from 1983
to 2008, the author used the term spread, defined for the most
part as
the
difference between 10-year and 3-month Treasury interest rates, to
model economic expectations and to forecast U.S. recessions. The
following is a summary of the use of the term spread in real time to forecast the
three officially-dated recessions that occured during this period.
1990-91
Recession
- November 16, 1988: memo to NY Fed
Research Director
analyzing the past predictive power of yield curve and noting that the
term
spread was currently low.
- February 8, 1989: above memo was transmitted to NY
Fed
President for discussion at subsequent meeting.
- June 14, 1989: memo to NY Fed
Research Director
noting that the average term spread for the second quarter of 1989 (to date)
was 10 basis points and that the implied probability of a recession in
the second
quarter of 1990 had risen to 26%.
- April
25, 1991: NBER
announced that a recession had begun in July 1990.
2001 Recession
- March 19, 2001: presentation to NY Fed President
about yield curve inversion
and other evidence of an impending recession, noting that the spread in
December
2000 had been -69 basis points and that the implied probability of a
recession in December
2001 was 45%.
- May 8, 2001: memo summarizing mounting evidence of a
current recession, using the preceding yield curve inversion as timing
benchmark.
- November 26, 2001: NBER
announced that a recession
had begun in March 2001.
2008+ Recession
- September 15, 2006: report to NY Fed President
indicating that the term spread in August 2006 had been -21 basis
points, with a probability of recession in August 2007 of 33%.
- October 26, 2007: memo to NY Fed President
summarizing
concurrent evidence of an economic slowdown, using the
preceding
yield curve inversion as timing benchmark.
- December 1, 2008: NBER
announced that a recession
had begun in December 2007.
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