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Conference Paper
Inflation and the stock market: Understanding the “Fed Model”
The so-called Fed model postulates that the dividend or earnings yield on stocks should equal the yield on nominal Treasury bonds, or at least that the two should be highly correlated. In US data there is indeed a strikingly high time series correlation between the yield on nominal bonds and the dividend yield on equities. This positive correlation is often attributed to the fact that both bond and equity yields comove strongly and positively with expected inflation. While inflation comoves with nominal bond yields for well-known reasons, the positive correlation between expected inflation ...
Working Paper
Soft Landing or Stagflation? A Framework for Estimating the Probabilities of Macro Scenarios
Amid ongoing trade policy shifts and geopolitical uncertainty, concerns about stagflation have reemerged as a key macroeconomic risk. This paper develops a probabilistic framework to estimate the likelihood of stagflation versus soft landing scenarios over a four-quarter horizon. Building on Bekaert, Engstrom, and Ermolov (2025), the model integrates survey forecasts, structural shock decomposition, and a non-Gaussian BEGE-GARCH approach to capture time-varying volatility and skewness. Results suggest that the probability of stagflation was elevated at around 30 percent in late 2022, while ...
Working Paper
Anchored to the Dot Plot: Central Bank Projections and Interest Rate Expectations
In January 2012, the Federal Reserve began publishing the Summary of Economic Projections (SEP) "dot plot," revealing FOMC participants' projections for the federal funds rate. This paper documents a dual role for SEP projections in the formation of private interest-rate expectations. On one hand, SEP projections contain valuable information, achieving lower forecast errors than consensus surveys, VAR models, and several market-based measures at many horizons. Because the SEP is informative, some reliance on it by private forecasters is natural. On the other hand, because the SEP is updated ...
Working Paper
Risk, uncertainty, and asset prices
We identify the relative importance of changes in the conditional variance of fundamentals (which we call "uncertainty") and changes in risk aversion ("risk" for short) in the determination of the term structure, equity prices, and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in dividend yields and the equity risk premium is primarily driven by ...
Working Paper
Asset Return Dynamics under Habits and Bad-Environment Good-Environment Fundamentals
We introduce a "bad environment-good environment" (BEGE) technology for consumption growth in a consumption-based asset pricing model with external habit formation. The model generates realistic non-Gaussian features of consumption growth and fits standard salient features of asset prices including the means and volatilities of equity returns and a low risk free rate. BEGE dynamics additionally allow the model to generate realistic properties of equity index options prices, and their comovements with the macroeconomic outlook. In particular, when option implied volatility is high, as ...
Working Paper
Macro Risks and the Term Structure of Interest Rates
We use non-Gaussian features in U.S. macroeconomic data to identify aggregate supply and demand shocks while imposing minimal economic assumptions. Recessions in the 1970s and 1980s were driven primarily by supply shocks, later recessions were driven primarily by demand shocks, and the Great Recession exhibited large negative shocks to both demand and supply. We estimate "macro risk factors" that drive "bad" (negatively skewed) and "good" (positively skewed) variation for supply and demand shocks. The Great Moderation is mostly accounted for by a reduction in good variance. In contrast, ...
Working Paper
The Near-Term Forward Yield Spread as a Leading Indicator : A Less Distorted Mirror
The spread between the yield on a 10-year Treasury bond and the yield on a shorter maturity bond, such as a 2-year Treasury, is commonly used as an indicator for predicting U.S. recessions. We show that such ?long-term spreads? are statistically dominated in recession prediction models by an economically more intuitive alternative, a ""near-term forward spread."" This latter spread can be interpreted as a measure of the market's expectations for the near-term trajectory of conventional monetary policy rates. The predictive power of our near-term forward spread indicates that, when market ...
Working Paper
Aggregate Demand and Aggregate Supply Effects of COVID-19: A Real-time Analysis
We extract aggregate demand and supply shocks for the US economy from real-time survey data on inflation and real GDP growth using a novel identification scheme. Our approach exploits non-Gaussian features of macroeconomic forecast revisions and imposes minimal theoretical assumptions. After verifying that our results for U.S. post-World War II business cycle fluctuations are largely in line with the prevailing consensus, we proceed to study output and price fluctuations during the COVID-19 pandemic. We attribute two thirds of the decline in 2020:Q1 GDP to a negative shock to aggregate ...
Discussion Paper
Why have far-forward nominal Treasury rates increased so much in the past few years? Old risks reemerge in an era of Fed credibility
Increases in far-forward nominal interest rates in recent years have been remarkable. For example, the increase in the 9- to 10-year forward Treasury rate over the past five years is the largest since its extraordinary ramp-ups in the late 1970s and early 1980s (Figure 1). The increase in far-forward rates is consequential for the economy because higher forward rates mean higher long-term Treasury yields, which boosts the current cost of long-term credit to households and businesses. Indeed, more than 80 percent of the variation in annual changes in the 10-year Treasury yield over the past 50 ...
Discussion Paper
(Don't Fear) The Yield Curve
In this note, we show that, for predicting recessions, such measures of a "long-term spread"--the spread in yields between a far-off maturity such as 10 years and a shorter maturity such as 1 or 2 years--are statistically dominated by a more economically intuitive alternative, a "near-term forward spread."