Real returns and recession risk… As real interest rates approached zero in the US, an environment in which the tightening and recession coefficients were evaluated together emerged. We observe that after the US 10-years exceeded 2.90%, it continued its stable course at the level of 2.81%. However, despite the stabilization, the upward trend in interest rates has not softened or changed. The fact that the Fed has an effect that will increase real interest rates means that it increases the risk of recession every time it is unable to reduce inflation and takes the dose of tightening further.

Comparison of US 10-year real rates and Fed funding rate… Source: Bloomberg

Terminal rate… The 10-year Treasury yield rose markedly on the back of aggressive policy tightening expectations. With Powell's bringing a 50 basis point series beyond 50 basis points to the agenda for May, the base scenario turns on the axis of aggressive tightening. Most of the committee are vocal about raising federal funds rates to “rapidly” neutral – what the median FOMC member currently estimates is 2.4%. This indicates that the terminal rate will be exceeded for the remainder of 2022.

Conclusion? The pricing of Fed futures funds in the Bloomberg terminal shows that the pricing of 4 jumbo rate hikes has been completed by September, while the projections until December show that 5 50 bps rate hikes are also within the pricing range. When we compare the FOMC's last SEM document with the median estimate of 1.9% for 2022, 2.8% for 2023 and 24, and 2.4% for the long-term, the fact that the Fed will indeed move forward with 5*50 bps is the upper band of funding. It would mean 3.5%. This is probably an exaggeration and a phenomenon that will increase the recessionary effect if inflation does not decrease and the Fed continues its need for rapid tightening. It is also possible that the Fed will be in a position to step back from such an extreme path, that even the SEM in the March FOMC showed the expectation of lowering the funding rate after 2024 in the eyes of the members. As of this week, the members will not be speaking as we are in the Fed blackout period. The roadmap to be drawn on May 4 will shape the forecasts after the first 50 bps.

Kaynak: Tera Yatırım

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