Eco Week
Editorial

The recession narrative

06/06/2022
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Since the start of the year, media increasingly use the word recession and, over the same period, there was a significant increase in Treasury yields. The common driver behind these developments is, to a large degree probably, the more hawkish tone from the Federal Reserve. Unease about recession risk shows up in the latest quarterly Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia. Recession probabilities across the projection horizon have moved higher and they are now well above what we have seen in the past at this stage of the tightening cycle. Exceptionally high inflation requires aggressive rate hikes to bring it back under control. This implies a difficult balancing act for the Federal Reserve and explains the heightened concerns about recession risk.

The narrative that the US may enter recession is gaining ground. Since the start of the year, more and more Bloomberg articles mention the word recession (chart 1). Interestingly, over the same period, there was a significant increase in Treasury yields. The common driver behind these developments is, to a large degree probably, the more hawkish tone from the Federal Reserve. Not only has it started a rate hike cycle, but it has also provided clear guidance of delivering several 50 basis points hikes during this year. Unsurprisingly, this has pushed bond yields higher, but it has also raised concern about recession risk. This also shows up in the latest quarterly Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia.