Things have been getting very interesting lately on the topic of the economic future of the US, at least from my perspective. I have written recently, in the ALCOTalk newsletter, about being ready for the recession countdown clock being triggered. Two of the models I referred to are long leading models. That means they are built to look ahead roughly two years. Things got really interesting this week because a couple of my short leading models are now flashing warnings. One example is the model below, it is my "Leading Economic Health Model". It is built to provide an average recession lead time of 12 months. If you squint hard, you will notice on the far right side of the chart, the model is now negative. This model is important now because, first, there are no data revisions to this model, a negative is now a negative. Second, it shows that economic activity is likely to deteriorate pretty quickly over the next 12 months.
I don't want to steer this discussion to "how bad" or "how long" a potential recession could be. More importantly, I want to point out today, that in every recession since 1954 (all the data I had), the FF rate has fallen an average of 51.64% DURING the recession. Even more important is that from peak to trough surrounding those recessions, the FF rate eventually fell an average of 76.24% from its ultimate peak.
Obviously, it's time to bring up the old "crystal ball" joke, I don't have one. However, the three models now flashing warnings have historically been very accurate. Hopefully this helps give you some color on the duration discussions your ALCO's should be having on future assets and liabilities. I will also point out that you shouldn't forget to include optionality in those discussions.
Have a great 4th of July holiday!