It will be nearly impossible for the North American economy to avoid a recession because interest rates will have to rise much higher to quell inflation, according to the head of fixed income at Bank of Montreal’s fund management division.

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99.9% odds of Fed-induced North American recession, BMO fixed income head says Back to video

“The likelihood of a recession is 99.9 per cent,” Earl Davis said Wednesday on BNN Bloomberg Television. “Why do I say that? The central bankers actually want a recession.”

Davis, who is chief of fixed income and money markets at BMO Global Asset Management, said a recession could easily drag into 2024. It won’t necessarily be a mild contraction, he said, because unlike past hiking cycles such as in 2018, the United States Federal Reserve and other central banks are far behind the inflation curve and rates will have to stay higher for longer to cut demand.

“It may end up being a policy mistake. But the playbook says you have to get a recession” to reduce inflation to acceptable levels, he said. “That is the key thing that the market has to get through.”

Treasury two-year yields were above four per cent early Wednesday afternoon, the highest since 2007, as traders waited for the Fed’s policy decision and latest economic projections.

Bloomberg.com