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Working Papers, No. 2022-31, July 2022 Crossref
Monetary Policy, Inflation Outlook, and Recession Probabilities

Why does the short-term slope of the yield curve predict recessions? We explore the economic forces underlying Treasury yields’ fluctuations and highlight the roles of a tight monetary policy stance and expectations of lower inflation in predicting downturns. While the monetary policy stance is still accommodative, indicating a low recession probability, the negative inflation slope points to higher odds of a recession within a year. An aggressive removal of policy accommodation increases the recession probability to 60%.

Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.


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