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Economic Forecasts with the Yield Curve

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  • Michael D. Bauer
  • Thomas M. Mertens

Abstract

The term spread?the difference between long-term and short-term interest rates?is a strikingly accurate predictor of future economic activity. Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve. Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession. While the current environment is somewhat special?with low interest rates and risk premiums?the power of the term spread to predict economic slowdowns appears intact.

Suggested Citation

  • Michael D. Bauer & Thomas M. Mertens, 2018. "Economic Forecasts with the Yield Curve," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfel:00158
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