Decline in U.S. Recession Odds Stalls with Pause in Fed Rate Cuts
As expected, the recent plunge in the probability of a recession someday being determined to have started at sometime in the next twelve months stalled out above the 20% threshold.
Through 17 March 2025, that probability is 22%, which applies to the period from 17 March 2025 through 17 March 2026. This estimate is based on the yield curve-based recession forecasting model developed by Jonathan Wright for the Federal Reserve Board in 2006.
This development is a direct result of the Fed choosing to pause its latest series of interest rate cuts after its 19 December 2024 quarter point rate cut. The recession probability based on Wright’s method is unlikely to drop lower until the Fed lowers the Federal Funds Rate below its current target range of 4.25-4.50%. Currently, the CME Group’s FedWatch Tool anticipates the Fed’s rate cuts will resume with another quarter point reduction in June 2025.
The following chart shows the trajectory of the Recession Probability Track from 20 January 2021 through 17 March 2025.
The main factor lowering the probability of a recession beginning in the last several months is the Federal Reserve’s interest rate cuts during 2024. The Fed’s reductions to the Federal Funds Rate released some of the building recessionary pressure from the Fed having boosted short term interest rates in 2022 and 2023 to combat the Biden-Harris administration’s runaway inflation.
The period from July 2024 through mid-September 2025 represents the most likely period in which the National Bureau of Economic Research will say the U.S. economy peaked before beginning a period of contraction. Should the NBER identify a month within this period as the starting month for a new recession, or business cycle contraction in the NBER’s terminology, it will be because it was “baked in” well before 2025 began.
We will continue following the Federal Reserve’s Open Market Committee’s meeting schedule in providing updates for the Recession Probability Track until the U.S. Treasury yield curve is no longer inverted and the future recession odds retreat below a 20% threshold.
At this writing, the yield curve has once again inverted by a very small amount, which is a consequence of the Fed’s pause in rate cuts. We anticipate the recession probability will rise to around 25% in the next few months, then start falling again after the Fed resumes cutting rates. We also anticipate it will continue to hold above the 20% threshold for some time unless the Fed becomes more aggressive in cutting rates.
Analyst’s Notes
The recession probability we’ve presented is based on the Federal Reserve Board’s yield curve-based recession forecasting model, which factors in the one-quarter average spread between the 10-year and 3-month constant maturity U.S. Treasuries and the corresponding one-quarter average level of the Federal Funds Rate. If you’d like to do that math using the latest data available to anticipate where the Recession Probability Track is heading, we have provided a tool to make it easy to do.
Previously on Political Calculations
We started this new recession watch series on 18 October 2022, coinciding with the inversion of the 10-Year and 3-Month constant maturity U.S. Treasuries. Here are all the posts-to-date on that topic in reverse chronological order, including this one….
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