With rising interest rates and inflation, will there be a recession this time?

Answer 1

I think we are headed for a recession. But it won't be caused by rising interest rates -- they are both effects of the same thing.

There was a study by Campbell Harvey of Duke University (it was his Doctoral Dissertation from U of Chicago) where he looked at the shape of the yield curve. He found that whenever the yield curve inverted (his definition was three month rate higher than five year rate) it was followed by a recession. This was a 100% indicator. He looked back to the 17th century, and looked at lots of different countries. The recession usually followed the yield curve inversion by two to four quarters.

In the US, there have been three yield curve inversions since he got his PhD. Two were followed by recessions. The third one happened a few months ago.

If you search for "yield curve inversion" and "recessin" you will find several news stories that claim that it is not a perfect indicator in the past. But if you look closely, you will see that they are looking at the two year bond rate versus the ten year bond rate. In the cases where "their inversion" wasn't followed by a recession, the 3-mo to 5-yr inversion never occurred. Harvey's results hold with 3-mo vs 5-yr.

Now -- you may ask why this happens. The theory comes from Doug Breeden's doctoral dissertation (Stanford -- late 1970s) on the relationship between consumption and interest rates. Here is the basic idea:

Suppose that things have been going well, but company CEOs start to worry that growth will not continue. They have been making money -- and need to invest it. If they think that growth will continue, they will put the money back into their firms. But if they think that there will be a slowdown or recession, they will do something else with it. One thing they can do is hedge their bets by purchasing medium term treasuries. This pushes the yield down relative to short term treasuries -- causing the inverted yield curve. Now if enough companies do this, in a year or two there will be a recession. Why? Because they didn't invest in growth -- so they can't grow. It becomes a self fulfilling prophesy.

Now -- what does all of this have to do with inflation? Well -- think about where our inflation is coming from -- it is energy costs. If gas and other energy costs are increasing, companies will realize it will cut into their profits & therefore into their growth. It will also make them realize that other firms will also have to slow down -- we get this pattern where companies do not invest as much in their firms and the economy slows down.

Recession follows.

Answer 2

Probably not. The overall condition of the economy is good. And the inflation is only reflecting energy spikes. The overall inflation rate is not rising fast enough. If however we hit some outrageous price of $100 a barrel at that time there will be a slow down as that cost of during business will be out of line. If you look at the past 30 years oil has not increased at the same inflationary rate as other items, so as bad as it seems oil is just catching up the things like milk, and houses. This is not to say that we need, desperately to create new refineries as there has not been a new one built since the 70's and we need to drill in as many areas as there is oil. Hope this helps.

Answer 3

You are a bit confused.

Interest Rates are raised to reduce inflation, not to cause it.

If inflation keeps going up then YES there will be a recession.

You need to buy a 1999 (Or newer) Volkswagen New Beetle (Or any other model) with a DIESEL engine as soon as possible and convince your friends to do the same thing.

You will reduce the number of gallons you buy each year to 0 and with enough people doing the same thing the number of gallons the United States of America buys each year will stay the same and that will cause the Oil Prices to go down and that will cause inflation to go down and that will not cause a recession.

Only you can stop this.

Answer 4

In the economy global world there is a mixture of variables and when we are talking about global economy we ever let some dark points....what ever a mention some situations that we call global recession linked to interest rates.... Too low interest rates in all the world could means that they are really negative (you do not receive return for your investment, in turn you pay for it) this is an absurd in economics and can provoke a massive disinvestment in all the world... Too high interest rates can provoke a crisis too because they are related to elevated levels of risk... In world economy the link between the economies is exchange rates so, monitoring exchanges rates we can see if the world economy is getting a crisis.... Could occur a crisis in interest rates but its effect can be contrarest by other variables and them not to reach the fluctuations in exchange rates.... I hope this little confusing answer can help you...

Answer 5

The is a great debate over this good question.
Most of the Bulls say no and some of the bears say yes.
I have listened to almost every investment show on tv and I don't think it will happen.
I also think the DOW will come down another 500 and then go back up....

Answer 6

It's just a market correction. It's still possible to get the loans relatively cheaply from venture capitalists and similar organizations. The investment level is still very high.

Answer 7

not really, the investment ratio is very high