US yield curve inversion and financial market signals of recession

The inversion of the US yield curve during the summer of 2019 increased speculation about the possibility of a US recession. However, standard yield curve-based recession probability models ignore factors such as the impact of quantitative easing measures that can distort the signals derived from the current yield curve. This box presents alternative models to deal with these possible distortions. In particular, measures of the term spread that account for asset purchases in the United States, spillovers from euro area purchases to US yields and the effect of foreign official reserve holdings on long-term US yields are constructed. US recession probability models that account for asset purchases predict significantly lower recession probabilities than those implied by standard yield curve models, pointing to a somewhat more benign outlook for the US economy. JEL Classification: E32, E44, E47, G17