US economy in for more serious recession than Powell said: market vet

• The US is in for a more serious recession than Fed Chair Powell thinks, according to Evercore’s Roger Altman.
• The market veteran pointed to the inverted Treasury yield curve and troubling signs among small businesses.
• A moderate recession is the most likely outcome by the end of the year, Altman warned.

The US is headed for an even more serious recession than Federal Reserve Chair Jerome Powell has projected, according to market veteran Roger Altman.

In an interview with CNBC on Wednesday, the Evercore founder and senior chairman pointed to comments from the chief central banker, who said a recession wasn’t the most likely probability for the US economy. 

But that’s contrary to the slew of economic indicators that suggest otherwise, according to Altman, who thinks a downturn is the most likely outcome by the end of the year. 

For one, the 2-10 Treasury yield curve – a notoriously reliable indicator of a coming recession when inverted – has posted its steepest inversion in over 40 years, with the yield on the 2-year Treasury surpassing the 10-year yield by more than a full percentage point last week.

Though a recession hasn’t been officially declared yet, the inverted yield curve has preceded previous recessions by about 18 months, according to Altman, as was the case for the downturns beginning in 1989 and 2006. 

Special business surveys are also spelling trouble for the economy, Altman said, pointing to Evercore’s trucking survey, an index of freight demand that the firm touts as a reliable recession signal. That index recently dipped below 48, a threshold that’s typically correlated with a downturn.

And though more bullish commentators have argued that current inflationary pressures have been fueled by the pandemic and are largely transitory, that doesn’t lessen the possibility of recession over the short-term, Altman said. Neither does the strong performance in stocks, which are at this point unlikely to price in bad economic news coming by the end of the year.

“To me, the likelihood is a moderate recession,” Altman said. “You can look at the yield curve. You can look at … the small business confidence index. You can look at so many data points which are pointing downward.”

Experts have been warning of heightened recession risks for the past year as the Fed aggressively raised interest rates to combat inflation. Rates are now at their highest range since 2007 – a level that could easily overtighten the economy into recession, especially since the full tightening effect of rate hikes takes months to fully show up in the economy.

Fed officials have also suggested rates could trend higher this year as inflationary pressures remain a concern. Markets are currently pricing in an 87% chance the Fed will hike rates another 25 basis-points at its next policy meeting, a move that would lift the fed funds rate to range of 5.25-5.50%. 

“We seen the steepest hikes in monetary policy in 40-something years. And again, looking at history, it would be too soon for them to have their full effect now. six months, different story,” Altman said.