A coming recession is signaled by the forward rate report
It is well known that an interest rate environment in which longterm debt instruments underperform shortterm debt instruments of the same credit quality is considered a predictor of recessions. It is reasonable to assume that a similar pattern will prevail ahead of future contractions in the economy.
This model uses 2year and 10year US Treasury yields as measures of shortterm and longterm rates, respectively, and calculates the forward rate ratio (FRR210) between the two rates.
FRR210 is the rate at which a loan can be locked in for the eightyear period starting in two years, divided by the tenyear rate itself. A FRR210 above 1.00 indicates a positively sloped yield curve (yields on tenyear notes are higher than yields on twoyear notes); a FRR210 below 1.00 indicates an inverted yield curve (yields on twoyear notes are higher than yields on tenyear notes). For the Forward Rate Ratio calculation formula, see the Appendix.
In Figure 1, the smoothed FRR210 shown is the exponential moving average of FRR210 (daily values) with a constant smoothing factor equal to 0.030. It can be seen that the yield curve was inverted prior to the last seven recessions (indicated by the forward rate ratio of 2 and 10year yields below 1.00). Currently (August 5, 2022), the yield curve is inverted with FRR210 at 1.00 indicating that we are entering the boom phase of the business cycle and approaching the next recession, as shown in Figure 2.
The dotted vertical red lines indicate when the smoothed FRR210 fell below 1.00. The dates and times of subsequent recessions are shown in the table below. The minimum delay was 39 weeks before the recessions of 1973 and 1981, the average being 62 weeks or 14 months.
Recessions  FFR210  To lead to Recession 
To lead to Recession 

Begin  End  Signal date  (weeks)  (years) 
January70  Nov70  05/01/68  87  1.68 
Dec73  March75  03/06/73  39  0.75 
Feb80  Jul80  10/09/78  69  1.32 
Aug81  Nov82  11/03/80  39  0.75 
Aug90  March91  02/22/89  75  1.44 
Apr01  Nov01  03/17/00  54  1.05 
Jan08  Jun09  08/29/06  70  1.35 
March 21st  Apr21  —  —  — 
It is also evident that the stock market posted gains for a few months after the FRR210 fell below 1.00, synonymous with the boom phase of the business cycle.
Annex
Forward rate ratio
The FRR is described in an article by Howard L. Simons in Stocks, Futures and Option Magazine, March 2007 and can be calculated for any two rates on the yield curve.
FRR210 is the rate at which a loan can be locked in for the eightyear period starting in two years, divided by the tenyear rate itself.
The FRR210 calculation formula is: FRR210 = { [(1 + i_{10})^{10} / (1 + i_{2})^{2} ]1/8 1} / i_{ten}Or I_{ten} and me_{2} are the yields of 10year and 2year US Treasury bonds, respectively.
Neglect compound interest: FRR210 = (5 i_{ten} – I_{2} ) / 4 i_{ten}