A model used by the Federal Reserve to track the U.S. Treasury yield curve — a key indicator of impending recession — reached its highest level since the Great Recession in August, according to CNN Business.
Now pegging the chance of recession at 38 percent, the model has risen sharply over the past year, and analysts are worried.
The Fed’s model never breached 50 percent before the last three recessions. “Anything over 30 percent is bad,” Nicholas Colas, co-founder of DataTrek Research, told CNN. “A lot of things have to go right to avoid a recession. We need a trade deal.”
What is the yield curve?
The yield curve measures the gap between long and short-term bond rates. During normal times, it’s more expensive for the government to borrow for a long time than shorter durations. But that relationship has been flipped upside down lately. So-called inversions have occurred before previous recessions.
But some have suggested that the model’s predictions are likely not as trustworthy today, considering that the bond market is currently operating in unprecedented conditions, CNN noted.
Central banks in Europe and Japan have dropped interest rates into the negative for the first time, and the next decade “will begin with the lowest interest rates in 5,000 years.”
This could be resulting in a false positive from the Fed’s model, some economists and analysts believe.
But the yield curve is not the only indicator blinking red.
CNN reported that the service sector has slowed to its weakest pace in three years, and there is no end in sight to President Donald Trump’s never-ending trade wars — neither of which bode well for the American economy.