Monetary Policy, Inflation Outlook, and Recession Probabilities

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 spread between long- and yields, Engstrom Sharpe (2019) have recently shown that measure nominal forward (NTFS), given by difference six-quarter-ahead current three-month bill rate, dominates long-term spreads leading indicator economic activity.