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Signal or Noise?: Implications of the Term Premium for Recession Forecasting: A Reprint from the “Economic Policy Review”
Joshua V. Rosenberg (au); Samuel Maurer (au)
Since the 1970s, an inverted yield curve has been a reliable signal of an imminent recession. One interpretation of this signal is that markets expect monetary policy to ease as the Federal Reserve responds to an upcoming deterioration in economic conditions. Some have argued that the yield curve inversion in Aug. 2006 did not signal an imminent recession, but instead was triggered by an unusually low level of the term premium. This article examines whether changes in the term premium can distort the recession signal given by an inverted yield curve. The authors find that the expectations component of the term spread is a leading indicator of recession, while the term premium component is not. Tables and graphs.
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