Recession Risks Mount with the Fed Determined to Crush Inflation 

This Macroeconomic Outlook report is excerpted from the Third Quarter 2022 Fixed-Income Sector Views.

With the labor market overheated and inflation considerably above the Fed’s target, we have entered an uncomfortable regime where good news is bad news, and the “Fed put” is deeply out of the money. For the first time in many years, the Fed is aggressively tightening financial conditions in an effort to slow the economy, keep inflation expectations in check, and bring inflation down to the 2 percent target.

The Fed’s crusade to crush inflation is reverberating around the world, as the strengthening dollar is boosting inflation and inflation expectations in other countries, forcing central banks to tighten policy abruptly to avoid an erosion of their own credibility. The tightening of global financial conditions will restrain growth, which is also being hampered by supply-side constraints: the U.S. unemployment rate has fallen to just 3.6 percent, commodity markets have been roiled by Russia’s war in Ukraine, and the Chinese economy has been hobbled by renewed COVID-19 lockdowns and property sector woes.

Recession risks have clearly risen, with the U.S. monthly real gross domestic product (GDP) proxy having declined at an annual rate of 1.8 percent from October 2021 through May 2022, an unusual turn of events outside of downturns. Available employment data remain strong, contradicting the recession narrative, but the pace of improvement in the labor market has slowed markedly since last fall. This indicates that labor market has already started to cool even before the full impact of tighter financial conditions has been felt. High-frequency indicators and news reports point to a further slowdown in the job market in coming months.

Inflation is a lagging indicator and continues to run far above the Fed’s target. While commodity prices and other leading indicators of inflation have cooled in recent months, the all-important headline consumer price index (CPI) number sits at a cycle high of 9.1 percent year over year as of June. Our analysis indicates that a Fed-induced downturn will be required to bring inflation down to target.

—By Brian Smedley, Matt Bush, and Maria Giraldo

Important Notices and Disclosures

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

© 2022 Guggenheim Partners, LLC. All rights reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC.

GPIM 53591

VIDEOS AND PODCASTS

 

Are Fixed-Income Investors Being Compensated for the Risks They Are Taking?

Maria Giraldo, Investment Strategist for Guggenheim Investments, joins Asset TV’s Fixed Income Masterclass.

×

Are Fixed-Income Investors Being Compensated for the Risks They Are Taking?

 

Macro Markets Podcast Episode 36: "It's a bond pickers market."

Anne Walsh, CIO for Guggenheim Partners Investment Management, discusses drivers of returns going forward. She also offers advice to young women looking to make a career in asset management.

×

Macro Markets Podcast: Episode #36