Forecasting recessions with the yield curve

A note on extracting information about future reessions from the term structure of interest rates including R code and analysis of US data.

I’ve always been interested in extracting information from financial prices and yields. Forecasting recessions with the yield curve develops a model using publicly available interest rate data to forecast the probability of recession in the United States. This has been topical recently as markets attempt to forecast the impact of tighter monetary policy by the US Fed.

At present, the yield curve suggests around a 0.5 probability of a recession 6 months ahead. This is a little higher than the probabilities indicated around the Lehman shock and in the early 2000s.