Fed Funds Rate vs Yield Curve (2s10s)
Fed Funds rate vs 2s10s spread — which drives recession risk?
One-year comparison
Left axis: Fed Funds Rate (green) · Right axis: Yield Curve 2s10s (blue)
The analysis
The Fed Funds rate is the policy tool; the 2s10s spread is the market's response to expected policy. When the Fed hikes aggressively, short rates rise faster than long rates and the curve inverts. Inversion is the market signaling the Fed has gone too far. Every Fed hiking cycle since 1955 except 1994-95 has produced either a recession or a significant financial-stress event.
Track the Federal Reserve's benchmark interest rate. Rate cuts after sustained hiking cycles often signal late-cycle recession risk.
Monitor the 2-year/10-year Treasury yield curve spread in real time. Yield curve inversions have preceded every US recession since 1955.