Ability to forecast yield curve inversions remains elusive, according to Cleveland Fed researcher

Study focuses on the difficulty of accurately predicting if and when the yield curve will invert

Quick Take:

• An inverted yield curve is often cited as a harbinger of recessions
• Recent flattening of the yield curve has placed it back in the spotlight for economists and policymakers
• Forecasting if and when the yield curve will invert has proven difficult

With the recent flattening of the yield curve, the possibility of an inversion has once again become a focus for economists and policymakers. An inverted yield curve, where interest rates on short-dated Treasury securities rise above long-term rates, has been a reliable indicator for each of the past three recessions, but forecasting if and when inversions will occur has been difficult, according to Federal Reserve Bank of Cleveland research economist Kurt Lunsford.

Lunsford examined data from Blue Chip Financial Forecasts from 1988 to the present to determine whether professional forecasters have been able to predict inversions of the yield curve in the past. The findings show that professional forecasters failed to predict the beginning of yield curve inversions that preceded recessions in 1990, 2001, and 2008.

“I find that a common cause of the failure to predict yield curve inversions is a failure to predict the magnitude of the rise in the 1-year Treasury rates. However, these short-term rate forecast errors have shrunk with each inversion episode, a situation that is consistent with the Federal Reserve’s increased transparency,” said Lunsford.

Click here to read the full commentary, Can Yield Curve Inversions Be Predicted?

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Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892