Jerome Powell warns America: recession on the horizon

Jerome Powell, the head of the Federal Reserve, made it clear to Senate banking committee members that sharp increases in interest rates could trigger a US recession. Whether it can be avoided, Powell said, depends largely on factors beyond the Fed's control.

The risk of a recession does not make that, however Federal Reserve will deviate from the chosen path. On Wednesday, Jerome Powell said in the US Senate that further interest rate hikes are the right tool to fight inflation, which turned out to be surprisingly high.

The latest Fed reaction was also unexpected. When expectations spoke of a 50 bp interest rate hike in June, the US central bank unexpectedly announced a move by 75 bp, which increased rates to 1,5-1,75 percent.

Therefore, the market consensus now assumes that The Federal Reserve will raise interest rates by another 75 basis points in July and then by 50 basis points in September. Ultimately, the cycle of increases would bring inflation down to the Federal Reserve's target of 2 percent, from the currently recorded level of 8,6 percent, the highest in 41 years.

The market believed in a recession

The clear warnings of the Fed chairman about the recession could scare investors in the commodity market and encourage them to invest their capital in bonds.

In theory, the recessionary phase of the business cycle leads to bonds. As the recession looms, investors begin to assume that interest rates may catch their peak a little earlier and thus bond yields may stop soaring so rapidly. This, in turn, could raise bond prices.

The recession also means lower demand for commodities, and when the bond market troughs, a peak may appear in the commodity market. Then, as bond prices rise, commodity prices may fall - at least that is what the business cycle theory assumes. Will it be confirmed in reality? We will probably find out in the coming quarters.