Calculating the odds of a recession based on the fed funds rate most likely used a dartboard. Or maybe some colorful dice.
I kid. Most likely it was a computational model, which is totally different from dartboards or dice because people won't pay institutional research firms who claim to use methods that are transparently easy to understand to try to predict macroeconomic market timing.
So I want to be clear - what you are reading is a sales pitch for Deutsche Bank, which is a sales pitch provided by Deutsche Bank Research, wrapped inside a sales pitch for Ned Davis Research, wrapped inside a sales pitch for Barron's, delivered as a sales pitch for Investopedia's blog.
It does not say how they calculate such a probability, because that is what Deutsche Bank would like you to pay them for. They have teams of highly educated, highly skilled, highly experienced analysts (who I'm sure are wonderful people) churning out weighted random numbers like this - they can't just give away the secret sauce!
But at a high level, I can tell you how they calculated it:
First you build a statistical model that takes certain variables and assumes or attempts to estimate certain relationships between the variables, which will likely include the fed rate and dozens, hundreds, or thousands of other variables. Then you take some source of data about market performance and fed rates, pulled from somewhere (probably bought it from a vendor, but maybe provided by an internal team). But you can't just put that in the model as-is, so you make a variety of ultimately arbitrary decisions on how to process the data, so you do that and feed it to the model. The model puts out tons of outputs, but no single number, so you have to either cherry pick out what number is interesting or try to shove all the numbers together somehow. If you do a good job you have a number of competing models and processes, but that only means you have even more numbers coming out the other side, so you have to cherry pick one or shove them together again.
The reporting team, or someone's boss, wants a number, such as the chance of the market going into recession in the next 12 months. They don't want a distribution, they don't want a confidence interval, they don't want to hear about your assumptions or your process or any of your mumbo jumbo about information theoretic predictive accuracy, pareto efficiency of estimators, or your concern about autocorrelation in the Kullback–Leibler divergence of the residuals - they want a damned number to put in the sales report, alright?
It's a nice number, no one is going to say you are insane for making it so high, and they won't say you are a Pollyanna who thinks a recession can't happen because it is so low. It also isn't 50%, because if you said that people would point out that's just saying bear vs bull is the result of a coin-flip! What are you, some kind of amateur?
Yeah, 60%. Now that's a number we can work with. But wait, why did we come up with this number? Don't tell me about all the variables you included in the model, so help me if you try to say something about "polynomial" or "multivariate" I'll slap the...right, bonds, let's go with that. Bonds are signalling, there we go - wrap that up and you've got a nice headline!
Bottom-line: news fit only to line the bottom of bird cages. It has no real informational content. Timing the market has long proven to be a fools errand - badly reported, non-transparent, baloney statistics don't change that.