With inflation roaring, bond yields jumping and the Federal Reserve seemingly poised to impose big interest rate increases, fear of recession is rising.
Consumer prices surged 8.5% in the 12 months through March, and the 10-year Treasury yield has gained 132 basis points this year to 2.83%. Meanwhile, the Fed began lifting rates in March, by 25 basis points.
Interest rate futures traders see an 87% probability of at least another 225 basis points of tightening this year.
Former Treasury Secretary Larry Summers, now a Harvard professor, has been warning about the increasing risk of recession.
“If you look at history, there has never been a moment when inflation was above 4% and unemployment was below 5% when we did not have a recession within the next two years,” he told Bloomberg.
The unemployment rate totaled 3.6% in March.
“So I think the odds on a hard landing within the next two years are certainly better than half, and quite possibly two-thirds or more,” Summers said.
The Fed apparently hasn’t gotten the message, he said.
“I don’t think the idea that is still embodied in Fed forecasts, that we could have continuing super-tight labor markets at 3 1/2% unemployment, and we could have inflation come down rapidly is a terribly plausible one,” he said.
We Can Pay Now … or Later
Either we’ll have to accept high inflation now, “in which case we’ll have an even bigger recession later, or some set of events involving monetary policy and what happens in the real economy are going to force a hard landing,” Summers said.
Deutsche Bank economists see recession coming too.
“Two shocks in recent months, the war in Ukraine and the build-up of momentum in elevated U.S. and European inflation, have caused us to revise down our forecast for global growth significantly,” Deutsche Bank economists wrote in a commentary.
“We are now projecting a recession in the U.S. and a growth recession in the euro area within the next two years.”
The Russia-Ukraine war has sent commodity prices soaring. The S&P GSCI Index of commodity prices has jumped 36% year to date.
Inflation Trouble
“The war, which has transitioned into a stalemate that is unlikely to be resolved any time soon, has disrupted activity on a number of fronts,” the Deutsche Bank economists note.
“These include upheavals in markets for energy, food grains, and key materials that have in turn further disrupted global supply chains.”
On the inflation front, average hourly earnings climbed 5.6% in the 12 months through March.
“More troubling, especially in the U.S., are signs that the underlying drivers of inflation have broadened, emanating from very tight labor market conditions and spreading from goods to services,” the economists said.
“Inflation psychology has shifted significantly. And while longer-term inflation expectations have not yet become unanchored, they are increasingly at risk of doing so.”
An inverted yield curve, which means short-term Treasury yields are higher than long-term yields, represents another problem. The two-month Treasury yield recently exceeded the 10-year yield for several days.
When that has happened in the past, recessions ensued in 18 months on average, Steven Rattner, chief executive of Willett Advisors, wrote in the New York Times.
