Unexpectedly Intriguing!
August 20, 2007

Since we last looked at the Federal Reserve's actions, the Fed injected well over 38 billion USD of liquidity into the economy to ensure that credit markets would not dry up for a lack of money. We thought we'd look at what that means for the probability of recession in the United States.

The chart below shows what happened last week to the U.S. Treasury Yield Curve:

U.S. Treasury Yield Curve, 13 August 2007 to 17 August 2007

The chart above shows that a major reversion has taken place. On Monday, prior to the Fed's actions of last week, the yield curve was essentially flat, with just 0.04% difference between the 10-Year and the 3-Month Treasuries. However, by Friday, the market's reaction to the Fed's moves greatly reduced the yield of the short term Treasuries. This change sharply reduced the probability of recession occurring in the U.S over the next 12 months, as can be seen by its retreat away from the 50% probability level in our chart for visualizing the probability of recession:

Probability of Recession Snapshots, 13 August 2007 and 17 August 2007

The chart above shows the daily snapshots for Monday, August 13 and Friday, August 17, 2007 given the values of the 3-Month, 10-Year and Federal Funds Rate for those days, rather than the 1-quarter rolling average of each. We find that the probability of recession occurring in the next 12 months from these daily snapshots plummeted from 34% to 15% from Monday to Friday.

We expect that the markets have a lot of shaking out to do still before the yield curve settles down, and there is also an increased likelihood that the Fed may lower the Federal Funds Rate, which will also affect the actual probability of recession.


About Political Calculations

blog advertising
is good for you

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts


This year, we'll be experimenting with a number of apps to bring more of a current events focus to Political Calculations - we're test driving the app(s) below!

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

Visitors since December 6, 2004:

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button


The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links
Charities We Support
Recommended Reading
Recommended Viewing
Recently Shopped

Seeking Alpha Certified

Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.