The Yield Curve as a Predictor of U.S. Recessions

Economists often use complex mathematical models to forecast the path of the U.S. economy and the likelihood of recession. But simpler indicators such as interest rates, stock price indexes, and monetary aggregates also contain information about future economic activity. In this edition of Current Issues, we examine the usefulness of one such indicator—the yield curve or, more specifically, the spread between the interest rates on the ten-year Treasury note and the three-month Treasury bill. To get a sense of the relative power of this variable, we compare it with other financial and macroeconomic variables used to predict economic events.