Probability of Recession: January 2007

The Federal Reserve's Open Market Committee announced yesterday that they would be leaving the Federal Funds Rate unchanged at 5.25%.

Using Political Calculations' recession probability tool, which determines the odds that the U.S. economy will enter into a recession sometime in the next 12 months, we find that the current probability of recession in the U.S. is 41.4%. This figure is based on the current level of the Federal Funds Rate and the yields at market close of the 3-Month Treasury (4.94%) and the 10-Year Treasury (4.79%) on January 31, 2007.

We've also updated our chart that tracks the odds of recession since the Federal Reserve began it's most recent series of rate hikes. For the first time since March 2005, the probability of recession on the date that the FOMC has announced any potential changes in the Federal Funds Rate has substantially receded:

Since the last FOMC meeting, the odds of recession have moved to a seemingly stable position in the lower 40 percents. While the probability of recession has increased slightly since the Fed last left interest rates unchanged, it is still within a narrow range it has been since the Fed set the 5.25% rate in June 2006. The peak occurred in late November/early December when the probability of recession neared 50%.

But, thanks to Paul Krugman, it now appears that 2007 will be largely recession proof!