1 In 42 Chance Of U.S. Recession Starting Before December 2019

As long expected, the U.S. Federal Reserve hiked short-term interest rates in the U.S. at the conclusion of its 18-19 December 2018 meeting, increasing the target range for their Federal Funds Rate by a quarter point to 2.25%-2.50%.

The risk that the U.S. economy will enter into a national recession at some time in the next twelve months now stands at 2.4%, which is up by roughly half of a percentage point since our last snapshot of the U.S. recession probability from early-November 2018. The current 2.4% probability works out to be about a 1-in-42 chance that a recession will eventually be found by the National Bureau of Economic Research to have begun at some point between 19 December 2018 and 19 December 2019, according to a model developed by Jonathan Wright of the Federal Reserve Board in 2006.

That increase from our last snapshot is roughly equally attributable to the Fed's most recent quarter-point rate hikes on 26 September 2018 and to the recent flattening of the U.S. Treasury yield curve, as measured by the spread between the yields of the 10-Year and 3-Month constant maturity treasuries, which has seen the 10-Year Treasury yield decrease as the bond market has priced in increased prospects for a global economic slowdown.

The Recession Probability Track shows where these two factors have set the probability of a recession starting in the U.S. during the next 12 months.

(Click on image to enlarge)

U.S. Recession Probability Track Starting 2 January 2014, Ending 19 December 2018

We continue to anticipate that the probability of recession will continue to rise into 2019, partially as a consequence to today's rate hike and also because the Fed communicated that it is likely to continue hiking the Federal Funds Rate up to three times in 2019. ZeroHedge captured the market's shock:

The market has a different perspective, where the CME Group's FedWatch tool is now anticipating no further rate hikes in 2019, and even the prospects of a rate cut in late 2019 or early 2020.

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