Diagrams/Data

Diagrams and Data
Explore further current and historical data for the Interest Rate Spread and how it relates to Real GDP and Six Month U.S. Treasury Bill Rates.
Current and Historical Data for the Interest Rate Spread
Review the current and historical data for the Interest Rate Spread by quarter at Economagic.com.
The Interest Rate Spread and Annual % Change in Real GDP
The diagram relates the interest rate spread (10year Tbond yield minus Fed funds rate) to the rate of economic growth. Notice how the interest rate spread became negative just before each of the recessions shown in the table, thus serving as an important leading economic indicator. The interest rate spread has correctly forecasted all U.S. recessions since World War II. Note that the interest rate spread again became negative during the last two quarters of 1998, and again in 2000 and the first quarter of 2001. While the first of these inversions may have occurred as a consequence of the Asian financial crisis, the latter inversion correctly indicated the recession that began in March 2001. While GDP growth is strong, the interest rate spread has been declining since the first quarter of 2004. While the Fed has been raising shortterm rates to head off inflationary fears, longterm rates have remained relatively low. The latter is due in part to China and other countries with a trade surplus with the US using their dollar holdings to buy US treasury bonds. The Fed doesn’t consider the current inversion in the interest rates spread to be a leading indicator of a coming recession. Not all economists agree. Go to the “Perspectives” link to read recent statements by the Fed concerning the inversion in the interest rate spread.Economagic.com provides a more complete collection of data for the following:
10Year U.S. Treasury Bond Rate I Federal Funds Rate I Real GDP
Interest Rate Spread and the 6Month TBill Rate
Economic theory suggests that the interest rate spread forecasts future shortterm interest rates. A negative interest rate spread forecasts both a recession and lower shortterm interest rates, while a sharply rising interest rate spread forecasts economic expansion and rising shortterm interest rates. The diagram provides some evidence in support of this theory. Notice that the negative interest rate spread in the early 1980's correctly forecasted the declining shortterm Tbill rates in 1982 and 1983. Likewise the negative interest rate spread in 1989 correctly forecasted the decline in shortterm Tbill rates in 1991 and 1993. The inversion of the interest rate spread in 2001 correctly forecast the fall in the rate on 6 month Treasury bills, which bottomedout in early 2004. The interest rate spread has again inverted, and the shortterm interest rates have stopped growing. If the relationship between the interest rate spread and short term rates continues to hold, we will see a decline in short term rates later in 2007.Economagic.com provides a more complete collection of data for the following:
10Year U.S. Treasury Bond Rate I Federal Funds Rate I Six Month Treasury Bill Rate
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