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 (10-year T-bond yield minus Fed funds rate) to the rate of economic growth. Notice how the interest rate spread became negative just before each of the four 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 inversions correctly forecasted the recession that began in March 2001. The strong positive value for the interest rate spread bodes well for economic growth in the latter quarters of 2003 into 2004.
Interest Rate Spread and the 6-Month T-Bill Rate
Economic theory suggests that the interest rate spread forecasts future short-term interest rates. A negative interest rate spread forecasts both a recession and lower short-term interest rates, while a sharply rising interest rate spread forecasts economic expansion and rising short-term 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 short-term T-bill rates in 1982 and 1983. Likewise the negative interest rate spread in 1989 correctly forecasted the decline in short-term T-bill rates in 1991 and 1993. The inversion of the interest rate spread in 2001 correctly forecast the continuing fall in the rate on 6 month Treasury bills. The strongly positive interest rate spread in 2002 and the first 2 quarters of 2003 suggests that short-term interest rates may soon rise.