Do you ever get the feeling that the officials who operate the Federal Reserve are getting their advice on how to set interest rates from really bad carnival psychics?
Since they stopped cutting interest rates in December 2024, the probability of a recession starting in the U.S. has risen. That's according to a recession forecasting method developed by Jonathan Wright while working for the Federal Reserve Board back in 2006. The method, which incorporates the yields of constant maturity 10-year and 3-month U.S. Treasuries and also the level of the Federal Funds Rate, which the Fed sets, can provide a good indication of the relative risk of a recession starting in the next 12 months based on historic data.
After having been elevated at probabilities exceeding 70% through much of 2023 and 2024, the recession forecasting model's projections only begin to drop when the Fed started cutting interest rates in September 2024, ahead of the U.S. elections. The Fed continued cutting interest rates through December 2024, then stopped.
The probability a recession would start in the U.S. during the next 12 months dropped to as low as 21.8% on 7 March 2025, then began rising again. Six weeks ago, it had risen back up to 25.9%. For this update, we find it is still in that ballpark, having dipped slightly to 25.5%. The latest update of the recession probability track shows how the probability of recession has evolved since 20 January 2021 in the context of how the difference between the yields of the 10-year and 3-month U.S. Treasuries combined with the level of the Federal Funds Rate have changed over this time.
This newest estimate applies to the probability the NBER will someday pick a month between 16 June 2025 and 16 June 2026 as the starting point for a period of economic contraction for the U.S. economy.
If Federal Reserve officials had continued their 2024 election season rate cuts, the probability of recession would have dropped well below the 20% threshold by now. These officials claim they're worried about the potential for inflation from President Trump's reciprocal tariffs, which has yet to materialize in the inflation data even though those new tariffs were put into effect in early April 2025.
Looking forward, we anticipate the forecast recession probability will remain around this level in the near term because Federal Reserve officials are expected to continue their pause in rate cuts into September 2025. At present, the CME Group's FedWatch Tool projects the Fed will wait until 17 September (2025-Q3) to cut the Federal Funds Rate by a quarter point, which will be followed by more quarter point reductions at 12 week intervals going into 2026.
Unless a deep inversion of the U.S. Treasury yield curve were to develop in the weeks ahead, we think the forecast recession probability will likely remain near its current level until the Fed resumes cutting short-term U.S. interest rates.
We will continue following the Federal Reserve's Open Market Committee's meeting schedule in providing updates for the Recession Probability Track until the U.S. Treasury yield curve is no longer inverted and the future recession odds retreat below a 20% threshold.
Analyst's Notes
The recession probability we've presented is based on the Federal Reserve Board's yield curve-based recession forecasting model, which factors in the one-quarter average spread between the 10-year and 3-month constant maturity U.S. Treasuries and the corresponding one-quarter average level of the Federal Funds Rate. If you'd like to do that math using the latest data available to anticipate where the Recession Probability Track is heading, we have provided a tool to make it easy to do.
For the latest updates of the U.S. Recession Probability Track, follow this link!
Previously on Political Calculations
We started this new recession watch series on 18 October 2022, coinciding with the inversion of the 10-Year and 3-Month constant maturity U.S. Treasuries. Here are all the posts-to-date on that topic in reverse chronological order, including this one....
- U.S. Recession Odds Holding Mostly Steady with Fed Holding Off on Rate Cuts
- U.S. GDP Contracts as Recession Odds Tick Up with Fed on Hold
- Decline in U.S. Recession Odds Stalls with Pause in Fed Rate Cuts
- U.S. Recession Probability Plunges to 27%
- U.S. Recession Probability Drops Below 50%
- U.S. Recession Odds Fall with Fed Rate Cut, But Are Still Elevated
- Triple Top Pattern Locking In for U.S. Recession Probability
- Triple Top Developing for U.S. Recession Probability
- U.S. Probability of Recession in Next Twelve Months Hovers Near 70%
- Recession Probability Falls After Hitting Double-Top
- U.S. Recession Probability Nears a Double-Top
- Probability of U.S. Recession Resurges to Nearly 75%
- U.S. Recession Odds Recede to Two Out of Three Chance in 2024
- U.S. Recession Probability Continues Receding on All Hallow's Eve
- U.S. Recession Probability Starts to Recede
- Probability of Recession Starting in Next 12 Months Breaches 80%
- U.S. Recession Probability on Track to Rise Past 80%
- U.S. Recession Probability Reaches 67%
- U.S. Recession Probability Shoots Over 50% on Way to 60%
- Recession Probability Nearing 50%
- Recession Probability Ratchets Up to Better Than 1-in-6
- U.S. Recession Odds Rise Above 1-in-10
- The Return of the Recession Probability Track
Image Credit: Microsoft Copilot Designer. Prompt: "An editorial cartoon of a Federal Reserve official consulting a psychic about whether to cut interest rates or not". We very slightly modified the text spoken by the psychic.
Labels: recession forecast
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