Recession. At some point in the next matter of years, there will be one
AI is undeniably exciting and worthy of deep research, and all else equal a reason to be optimistic about stocks and the economy. But at present, it has to be classified as an excuse for a new bull market, not a reason for one.
Fed’s own position is that it can consistently safeguard financial stability with one tool, by releasing liquidity into the system, while fighting inflation with another tool, higher interest rates.
In terms of the effect on asset prices, it still appears that the Fed’s interventions in liquidity matter a lot.
When interest rates over short periods are higher than over longer periods, it tends to imply that the market is braced for rates to be cut soon — which in itself implies that a recession will force the central bank to do so. The yield curve has been inverted continuously for 11 months.
If a recession can be avoided despite such aggressive tightening by the Fed, and with such a negative signal from the yield curve, it would be historically remarkable.
One final point about a recession concerns timing. At some point in the next matter of years, there will be one.
John Authers Blomberg 20 juni 2023
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