Unexpectedly Intriguing!
July 16, 2019

We're a little over the halfway point between the Federal Open Market Committee's scheduled meetings, where the Federal Reserve's interest rate-setting body will announce a quarter point rate cut in the Federal Funds Rate at the conclusion of its next two-day meeting on 31 July 2019, its first reduction since December 2008 when it dropped to near-zero.

According to the probabilities indicated by the CME Group's FedWatch Tool, that reduction will be the first of three rate cuts in 2019, which if all are implemented as currently expected, will lower the target range for the interest rate the Fed charges banks to borrow money overnight from today's level of 2.25-2.50% to 1.50-1.75% by the end of 2019.

Using a model developed by Jonathan Wright back in 2006, at today's levels, the Federal Funds Rate combined with the ongoing inversion of the 10-Year and 3-Month U.S. Treasuries indicate a nearly 1-in-10 chance that the National Bureau of Economic Research will someday determine that a national recession began in the United States sometime between 12 July 2019 and 12 July 2020. The Recession Probability Track shows those odds as a 10% probability, which has occurred because of the sustained inversion of the U.S. Treasury yield curve since 23 May 2019.

U.S. Recession Probability Track Starting 2 January 2014, Ending 12 July 2019

The Recession Probability Track is 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.

Because Wright's model was developed using historic data prior to when the Fed adopted its unconventional monetary policy of quantitative easing as the Federal Funds Rate was held at near-zero levels, it doesn't take into account the effects of the reverse of that policy, quantitative tightening, which has been ongoing since May 2014, and which the Fed plans to continue into September 2019.

Measured as the "shadow Federal Funds Rate", several analysts have indicated they believe quantitative tightening would add at least three full percentage points to the nominal Federal Funds Rate if it were incorporated in that interest rate, raising it to an adjusted level of about 5.4%.

When we subsitute that adjusted Federal Funds Rate into our recession odds reckoning tool, which like our Recession Probability Track chart is based on Jonathan Wright's paper, we find the adjusted probability of recession starting between 12 July 2019 and 12 July 2020 is 40%, or rather, a chance of 1-in-2.5.

If you have a particular recession risk scenario you would like to consider, please take advantage of our recession odds reckoning tool. It's really easy, and if it helps, the average yields of the 10-Year and 3-Month Treasuries over the last 90 calendar days ending on 12 July 2019 are 2.28% and 2.32% respectively, while the average effective Federal Funds Rate over the same period is 2.40%.

If you would like to catch up on any of the analysis we've previously presented, here are all the links going back to when we restarted this series back in June 2017.

Previously on Political Calculations

Labels:

About Political Calculations

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

Stock Charts and News

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

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

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button

JavaScript

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

Useful Election Data
Charities We Support
Recommended Reading
Recently Shopped

Seeking Alpha Certified

Archives
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.