Should he? FRB Minneapolis Fed President was at UW Madison today, and stated:
“The fact that the yield curve is now uninverted gives me some indication that we have taken the brakes off the economy,”
Should we rest easy? In some sense, the answer is “yes”.
Take the plain vanilla term spread model; run a probit regression of recession 12 months ahead on the simple 10yr-3mo spread, and one obtains an 50% probability of recession in August 2020, declining to 39% by October. This point supports Kashkari’s view. In addition, as many have pointed, the historical correlations may not provide a reliable guide to recession probabilities, given the drastic change in the size and sign of the term premium, and the implied recession probability is actually substantially lower.
Simply subtracting off