The NY Fed's Recession Probability model is flashing alarms for an incoming downturn, with odds at 38%.
But given how reliable the indicator is, that's really a near-100% chance of a recession, according to DataTrek's Nicholas Colas.
"It is clearly saying high short term interest rates are going to cause a recession in the next 12 months. Moreover, these odds are very likely to increase," Colas warned.
The New York Fed's Recession Probability model is indicating that a "Powell recession" in 2023 is almost a certainty, according to the research firm DataTrek.
The model measures the difference between yields on the 3-month and 10-year Treasury - similar to the 2-10 Treasury curve, which is a notorious bellwether of a recession when the curve is inverted.
Analysts have called the 3-10 Treasury curve a "more accurate" predictor, and Federal Reserve Chairman Jerome Powell has previously called it his preferred recession warning.
It's now signaling a 38% probability of a recession, according to the NY Fed, but the indicator is really sounding alarms for a near-100% chance of a recession, given how reliable it is, DataTrek co-founder Nicholas Colas said in a note on Wednesday.
He pointed to the model's track record over the last 60 years, noting that nine out of 11 times, a probability reading over 30% was able to predict a downturn.
"It is clearly saying high short term interest rates are going to cause a recession in the next 12 months. Moreover, these odds are very likely to increase," Colas said, referring to the expected 50-basis-point hike at next week's Federal Open Markets Committee meeting.
While that's a slowdown from the recent streak of 75-basis-point hikes, the probability model suggests that markets already see rates as too restrictive, meaning there could be a Fed-induced recession, or as Colas calls it, a "Powell recession."
"Chair Powell will almost certainly have to answer a question about the likelihood of a recession at his post-FOMC press conference next week. He might cite the NY Fed's model and say '38 percent.' But, based on the model's history, the real answer is 'close to 100 percent,'" Colas warned.
The fear of a downturn has weighed heavily on stocks all year, with the S&P 500 sliding 17% from levels in January amid rising inflation and aggressive Fed rate hikes. The central bank has raised rates by 375 basis points so far this year to rein in high prices, a level that risks overtightening the economy, market commentators say.
JPMorgan CEO Jamie Dimon has said the US could soon fall into a recession and cause stocks to drop 20% - a prediction that has since been echoed by analysts at Morgan Stanley, Bank of America, and Deutsche Bank.