IBKR Podcasts: What? No Recession?
Investors have expected a recession for nearly a year now. The Federal Reserve has been raising interest rates since last March. And in 15 months, they’ve managed to raise rates at their fastest rate since the early 1980s.
Meanwhile, the banking sector has shown the strain of that intense pace of hikes. Regional banks that invested in U.S. Treasuries had a duration mismatch, and faced losses as customers pulled deposits. Yet signs suggest that fears of a recession are overblown.
While consumer sentiment is declining, other economic indicators may suggest a potential “soft landing” for the economy after all.
Markets expect that the Federal Reserve will hold interest rates steady from here. And that interest rates will likely decline if signs point to a recession. But if there is no sign of a recession, then interest rates may stay at the current level through the end of the year.
This view may explain why the market rally of 2023 has slowed. Volatility has declined to its lowest level in over three years.
However, this economic cycle has been dominated by the pandemic. The massive stimulus that started in 2020 to keep the economy afloat continued for nearly two years. We’re now just entering the first year with interest rates over zero percent to bring down inflation.
So while the market returns for the year may slow from here, we may not get a recession. And that could mean interest rates stay higher for longer.