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Federal Reserve Bank of San Francisco
FRBSF Economic Letter
Information in the Yield Curve about Future Recessions
Michael D. Bauer
Thomas M. Mertens
Abstract

The ability of the Treasury yield curve to predict future recessions has recently received a great deal of public attention. An inversion of the yield curve—when short-term interest rates are higher than long-term rates—has been a reliable predictor of recessions. The difference between ten-year and three-month Treasury rates is the most useful term spread for forecasting recessions—without any adjustment for an estimate of the underlying term premium. However, such correlations in the data do not identify cause and effect, which complicates their interpretation.


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Michael D. Bauer & Thomas M. Mertens, "Information in the Yield Curve about Future Recessions" , Federal Reserve Bank of San Francisco, FRBSF Economic Letter, number 20, 2018.
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