Thursday, October 21, 2010

NY Fed Model: 1-in-50 Chance of 2011 Double-Dip

The New York Federal Reserve updated its "Probability of U.S. Recession Predicted by Treasury Spread" with treasury yield data through September 2010, and the Fed's recession probability forecast through September 2011. The NY Fed's Treasury model uses the spread between the yields on 10-year Treasury notes (2.65% in September) and 3-month Treasury bills (0.15%) to calculate the probability of a U.S. recession up to twelve months ahead (see details here) using the spread between those two yields.

The Fed's model (data here) shows that the recession probability peaked during the October 2007 to April 2008 period at around 37-42% (see chart above), and has been declining since then in almost every month.  For September 2010, the recession probability is only 0.45% and by September of next year the recession probability is slightly higher, but still less than 2% (1.7%). According to the NY Fed Treasury Spread model, the chances of a double-dip recession through fall of next year are less than 1 out of 50.


At 10/21/2010 6:43 PM, Blogger Junkyard_hawg1985 said...

I don't believe this is a reliable indicator since the data available at the current short term interest rates only has one historical equivalent. With short term rates near zero, it is impossible to invert the yield curve. When else have we had interest rates like the current ones? In the 1930's when we experienced the 1937-38 depression within the depresion, the short term rates were near zero and the long term rates around 2.5%. This is where we are today.

At 10/21/2010 7:01 PM, Blogger morganovich said...

why does anyone believe this model has predictive value?

look at the late 70's and 80's. it missed all 3 recessions until they were already happening.

it missed the 60's as well and gave almost no signal in 2001.

even if we believed that the model worked, assuming the the current yield curve would stave off recession seems like cargo cult thinking. the current heavily manipulated curve is not driving lending as would be predicted. this is because, as hawg pointed out, we are in a debt bust like the 30's. this yield curve is pushing on a string.

to see zero manufacturing growth and order deterioration from philly fed today is hardly the sort of growth you'd expect these rates to drive, nor are near record (and cycle) low mortgage originations.

the whole premise of this model makes it useless to assess a debt bust.

At 10/21/2010 9:07 PM, Blogger VangelV said...

Is this the same model that said there was no problem with the housing market?

At 10/21/2010 9:28 PM, Blogger Hydra said...

There is a lot of money sitting around at or near zero interest.

Sooner or later the owners will get creative at putting it to work.

At 10/22/2010 7:34 AM, Blogger niknaknoo said...

I wouldn't take any notice of what a Fed model may or may not predict. They are clueless!! Just look at their past record.

At 10/22/2010 8:11 AM, Blogger VangelV said...

There is a lot of money sitting around at or near zero interest.

This is a myth. While there is a float that is substantial most money is actually in money market funds, bond funds, and savings accounts that have all invested that money into commercial paper, bonds, and loans. That is hardly money 'sitting around' and in order for it to be put to use you need to see it repaid.

Sooner or later the owners will get creative at putting it to work.

When the money that is now in commercial bonds, T-bills, treasuries, or commercial paper gets put to other uses you will see the bond market bubble pop and interest rates spike. If the Fed acts to prevent that by monetizing debt then you will see a collapse of the currency. Either way most people in the real economy take a huge hit and people on fixed incomes and savers get wiped out.

At 10/22/2010 8:27 AM, Blogger rjs said...

its all about the confidence fairy...the Fed has stated they are using the communication channel to influence the economy...


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