200bps more - Will the Fed hike the economy into recession?

  • The flattening (and partially inverted) US yield curve is signaling rising recession fears. There are signs that a rapid hiking cycle could narrow the window for a “soft landing” as a slowing economy amid elevated energy prices makes a recession increasingly probable. Corporate earnings have already halved from the recent peaks while the credit impulse has turned negative as banks have begun tightening their lending standards.
  • However, the US economy has not reached an overheating phase (and growth is in fact slowing), with the policy rate still at record low levels. Corporate and household balance sheets have become less vulnerable to rising interest rates, thanks to rising cash buffers and lower leverage. But we believe the US Federal Reserve could raise the policy rate by not much more than 200bps without causing a recession, for instance, triggered by a collapse of the US housing market.
  •  Under baseline conditions, long-term rates have little room to rise further; however, in light of recent shift of the yield curve dynamics to longer maturities, the 10-year US Treasury yield could soon test the 3%-mark before declining during the remainder of the year. 

Contact

Alexis Garatti
Euler Hermes
Patrick Krizan
Allianz SE