Fed Raises Rates, Recession Risk To Rise In Response

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by: Ironman at Political Calculations

The risk of a national recession beginning in the United States anytime in the next year, from June 13, 2018, through June 13, 2019, has slightly increased by 0.2% over the last six weeks, where the odds now stand at 0.8%.

Obviously, that's still a very low probability, where the increase is mainly attributable to the Fed's recent series of quarter-point rate hikes. At the same time, a very slight narrowing of the U.S. Treasury yield curve, as measured by the spread between the 10-Year and 3-Month constant maturity treasuries, has also made a small contribution.

Our Recession Probability Track shows where the recession risk for the U.S. stood at the end of June 13, 2018.

Since the Fed acted to hike short-term interest rates in the U.S. again at the conclusion of its two-day June 2018 meeting, boosting the Federal Funds Rate to a new target range of 1.75-2.00%, the risk of recession will soon rise above the 1% threshold.

But perhaps more significantly, the Fed indicated that it would be likely to increase short-term interest rates in the U.S. twice more in 2018, near the end of the third quarter of the year and again near the end of the fourth quarter of the year.

That change in outlook was almost immediately reflected in the future expectations of investors, as measured by the CME Group's FedWatch tool, where the probability of a rate hike in the fourth quarter of 2018 increased from 46.5% at the beginning of the day to 52.2% by the close of U.S. markets.

If you want to get a good sense of where the recession probability track is likely to head next, you are more than welcome to take advantage of our recession odds reckoning tool, which is also based on Jonathan Wright's 2006 paper describing a recession forecasting method using the level of the effective Federal Funds Rate and the spread between the yields of the 10-Year and 3-Month Constant Maturity U.S. Treasuries.

Just plug in the most recent data available, or the data that would apply for a future scenario that you would like to consider, and compare the result you get in our tool with what we've shown in the most recent chart we've presented.