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The Forward Rate Ratio: A Long Leading Recession Indicator

  • Prior to recession the yield curve becomes inverted, as indicated by the Forward Rate Ratio between the 2-year and 10-year U.S. Treasury yields (FRR2-10) being less than 1.00.
  • Currently the FRR2-10 is about 1.20 signifying that US economic activity is in the expansion phase of the business cycle, far away from the next recession.
  • When FRR2-10 falls to near 1.00 the transition from expansion to boom occurs. For the last seven recessions the average lead time after FRR2-10 becomes less than 1.00 was 14 months.

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