Reader Bruce Hall notes the correlation between Fed funds fee peaks and recessions, as a counterpoint to my use of unfold inversions.
Let’s examine peaks to inversions:
Determine 1: Fed funds (blue), and 10yr-3mo Treasury unfold (tan). NBER outlined peak-to-trough recession dates shaded grey. Supply: Treasury, Fed by way of FRED, NBER.
Inversions and peaks precede recessions. Which one does higher as a single predictor? I assess utilizing a normal probit regression.
Determine 2: Probit regression on recession lead by 12 months on Fed funds (blue), and on 10yr-3mo Treasury unfold (tan). NBER outlined peak-to-trough recession dates shaded grey. Supply: NBER, and writer’s calculations.
The probit regression on the Fed funds has a pseudo-R2 of 0.07, whereas that on the unfold has a pseudo-R2 of 0.27.
Individually, I’ll stick with the unfold.