{"id":207002,"date":"2024-02-22T22:30:57","date_gmt":"2024-02-22T22:30:57","guid":{"rendered":"https:\/\/michigandigitalnews.com\/index.php\/2024\/02\/22\/fed-funds-vs-spreads-in-recession-prediction\/"},"modified":"2025-06-25T17:21:43","modified_gmt":"2025-06-25T17:21:43","slug":"fed-funds-vs-spreads-in-recession-prediction","status":"publish","type":"post","link":"https:\/\/michigandigitalnews.com\/index.php\/2024\/02\/22\/fed-funds-vs-spreads-in-recession-prediction\/","title":{"rendered":"Fed funds vs. Spreads in Recession Prediction"},"content":{"rendered":"

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Reader Bruce Hall<\/a> notes the correlation between Fed funds rate peaks and recessions, as a counterpoint to my use of spread inversions.<\/p>\n

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Let\u2019s compare peaks to inversions:<\/p>\n

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Figure 1:<\/strong> Fed funds (blue), and 10yr-3mo Treasury spread (tan). NBER defined peak-to-trough recession dates shaded gray. Source: Treasury, Fed via FRED, NBER.<\/em><\/p>\n

Inversions and peaks precede recessions. Which one does better as a single predictor? I assess using a standard probit regression.<\/p>\n

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Figure 2:<\/strong> Probit regression on recession lead by 12 months on Fed funds (blue), and on 10yr-3mo Treasury spread (tan). NBER defined peak-to-trough recession dates shaded gray. Source: NBER, and author\u2019s calculations.<\/em><\/p>\n

The probit regression on the Fed funds has a pseudo-R2 of 0.07, while that on the spread has a pseudo-R2 of 0.27.<\/p>\n

For my part, I\u2019ll stick to the spread.<\/p>\n<\/p><\/div>\n

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