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Yield curve says US recession risk low-Fed analyst

*So who trusts Fed ANALysts now-a-days???...

Yield curve says US recession risk low-Fed analyst
By Enrique Martel
Fri Oct 21, 2005 3:23 PM ET

SAN JUAN, Puerto Rico Oct 21 (Reuters) - Yield curve analysis shows the probability of a U.S. recession is greater than it was a year ago but remains low, a senior vice president of the Federal Reserve Bank of New York said on Friday.

Arturo Estrella, a specialist in financial markets and on models that use the yield curve as a leading economic indicator, said the latest update on the slope of the yield curve -- the difference between long-term and short-term interest rates -- shows the U.S. economy far from a recession.

"What the yield curve is saying right now is that we have to be more alert," said Estrella, who gave a presentation on the U.S. economy at Sacred Heart University in San Juan.

According to yield curve analysis, the probability of a recession is about 12 percent, Estrella said. While that is worse than the signal sent in 2004, when the curve showed a zero percent probability of recession, it is still well below the levels which have heralded economic slowdowns in the past.

"It has to reach 30 or 33 percent, when recessions have occurred before. But in this moment it is around 12 to 13 percent. It's still far from reaching 30 percent," he said.

The difference between long-term and short-term interest rates has borne a consistent negative relationship with subsequent real economic activity in the United States, with a lead time of about four to six quarters, Estrella said.

He said the yield curve ratio turned negative prior to every recession since 1950 apart from a slowdown in 1967.

"That wasn't a recession but what they called a credit crunch," Estrella said of 1967.

A flat or inverted yield curve can signal recession as it shows long-term investors are willing to settle for lower yields now because they think the economy will slow and rates will go even lower.

According to Estrella, the U.S. yield curve ratio was at 0.7 last week. It reached 3.6 in 2004 and fell close to negative 0.5 immediately prior to the 2001 recession. During 1979 and 1980, another time of depressed economic activity, the ratio dropped as far as negative 3.6.


LINK: http://today.reuters.com/investing/financeArticle.aspx?type=bondsNews&storyID=2005-10-21T192401Z...