THINK Ahead: No, central banks aren’t about to cause a recession
The desk is taking a cautious stance on the potential for central bank rate hikes to trigger a recession, as articulated by James Smith in the recent commentary. He argues that higher interest rates, particularly in the U.S. and Eurozone, may not have the same contractionary effect as they have in past cycles due to the prevalence of fixed-rate mortgages. Per the full note , only around 4% of U.S. mortgages are variable rate, suggesting a muted impact on consumer spending despite the hawkish shift from the Fed and ECB. With updated forecasts anticipating further rate increases before year-end, the desk believes current market expectations may be overestimating the risks of an imminent recession as existing borrowers remain relatively insulated from immediate rate impacts.
What the desk is arguing
The desk argues that central banks, while maintaining a hawkish posture, are unlikely to trigger a recession in the near term. This view, grounded in James Smith's analysis, highlights how the nature of modern mortgage structures mitigates the immediate effects of rising interest rates. Such insights emphasize the decoupling of monetary policy from direct economic repercussions, a shift not fully recognized by the market.
Smith points out that, unlike pre-financial crisis periods when a higher percentage of mortgages were on floating rates, today's landscape reveals that only about 4% of U.S. mortgages are variable. This substantially lowers the sensitivity of consumer spending to Fed actions, as many homeowners remain locked into lower fixed rates, protecting them from current higher rates on new loans.
This raises questions about the prevailing narrative that positions central bank actions as recession catalysts. The view that existing homeowners will feel significant pressure from rate hikes is arguably overstated, given that many are still benefiting from historically low mortgage rates.
Where it sits in our coverage
Our consensus target for the EUR/USD is 1.075, with a range spanning from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
This cautious stance aligns with jpmorgan's outlook but diverges from bofa, which suggests a more pronounced downturn. Our position is at the upper bound of the consensus spread, reflecting an optimistic take on the resilience of the economy despite hawkish policy signals.
How other firms see it
Firms like jpmorgan and ms align with our view that while rate hikes may tighten margins, they won't necessarily precipitate a recession in the near term. Conversely, bofa stands in opposition, suggesting that the economic environment may be more susceptible to adverse effects from rate increases.
Key indicators to watch include the EUR/USD trajectory, which is closely linked to ECB monetary policy decisions. Also noteworthy will be updates on mortgage applications and consumer spending data as the market assesses rate impact moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Mortgage structures are less sensitive to rate changes, reducing recession risk.
- 02Recent Fed and ECB rate hikes may not translate into immediate economic contractions.
- 03Firm forecasts reflect a cautious optimism around economic resilience despite tightening policies.
Market implications
Traders should keep an eye on the EUR/USD around the 1.075 mark, as the upcoming economic data could signal shifts in consumer sentiment and lending responses to rate hikes. Observing housing market indicators will also be crucial in gauging resilience to higher rates.
Risks to this view
A significant reversal in the economic outlook would occur if a sharp increase in mortgage defaults or a notable decline in consumer spending were to manifest, directly contradicting the current narrative of resilience amidst tightening monetary policy.
Opinions Opinion by James Smith THINK Ahead: No, central banks aren’t about to cause a recession Published 13:43 Rate hikes are undoubtedly contentious right now. Some think it's an error. But a recession starter?
James Smith explains why he just isn't that convinced We've recently updated our forecasts for both the Fed and the ECB, and now expect rate hikes from both before year-end No, central banks aren’t about to cause a recession Central banks are one of those things investors just love to hate. Equity bubbles? Blame central banks for keeping rates too low.
Equity corrections? Blame them for hiking too soon. That sort of thing.
This month has been no different. Both the European Central Bank and the Federal Reserve have hiked rates. Both have hinted that there's more to come.
Everyone's got something to say about this. For some, it's long overdue. Others say central banks are laying the groundwork for the next recession.
Personally, I find that far-fetched. And that's from someone who's spent much of this month scratching his head at the hawkish shift we've seen from policymakers. For one thing, interest rates don't work like they used to.
Only 4% of US mortgages are on floating rates. Pre-financial crisis, it was more like 30%. Most are fixed for decades.
That explains why the average rate on existing mortgages is "only" 4.3%, less than a percentage point above its Covid lows, even as the 30-year rate for new mortgages has stayed north of 6% ever since 2022. It's an almost identical story in the eurozone, albeit at lower rates, and admittedly it varies a lot between member states. How the average rate on existing mortgages has changed Source: Macrobond, ING "> Source: Macrobond, ING Higher mortgage rates can kill off appetite for new lending.
US mortgage applications collapsed in 2022 and haven’t recovered since. But more importantly, existing homeowners haven't felt anything like the full force of higher rates. That helps explain why all the mega rate hikes four years ago didn’t trigger a recession.
And let’s face it, that was a major shakedown of the financial system. But the real reason we didn’t get recessions back then was because the economy was still riding the coattails of Covid. Households were still sitting on piles of “excess savings”.
Jobs markets were exceptionally hot. Pandemic-era fiscal stimulus was still working its way through the system. And in Europe's case, governments effectively absorbed most of the energy shock through higher borrowing.
If energy prices keep rising, businesses and consumers will increasingly have to wear the bill themselves. That would undoubtedly hit growth. In an extreme scenario, it could even trigger a recession.
But that’s exactly the point. If higher energy prices cause a downturn, then higher energy prices cause a downturn. A couple more rate hikes from central banks won't fundamentally change that story one way or the other.
What if the bigger threat isn’t the hikes we’re seeing today – but the ones we had four years ago? My point earlier was that fixed-rate borrowing slows down the transmission of monetary policy. But the longer rates stay high – and let’s face it, it’s been a while now – the more corporate debt that has to get refinanced.
The current sell-off in longer-term bonds, of which the Fed is only one driver, certainly isn't helping matters. And there’s mounting focus on the impact this is having in the more leveraged corners of the credit world. Did someone say private credit?
Here’s the thing, though. If you look at what’s propelling the US economy, it’s the gargantuan amount of AI investment. James Knightley reckons it is contributing a third of economic growth in 2026 .
And the remarkable thing is that this is being done even as market interest rates have risen. The hyperscalers are coming to the bond market in insane size – and seemingly without much regard to the cost. Chatting to our credit guru Tim Rahill, he says it shows these big tech firms need to do ‘whatever it takes’ to keep the AI story on the road.
And a few rate hikes aren’t going to stop them. This is arguably why the Fed has become so motivated to hike rates in the first place. Of course, there’s plenty of talk about an AI bubble.
But if that’s the case, is it really going to be the Fed that bursts it? In the end, it comes down to scale. Our view is that central banks won’t end up hiking rates all that far.
Our updated central bank calls , released today, see one more rate rise from the ECB and Fed in December. A lot depends on energy prices, of course. But as I wrote a couple of weeks back , we’d still question Fed Chair Kevin Warsh’s hawkish stance on US inflation.
And in Europe, these hikes are still really being built for insurance purposes, with little sign of second-round effects on inflation so far. The thing about insurance, of course, is that it’s not difficult to cancel when you no longer need it. We’re still pencilling in cuts by late next year.
By historical standards then, assuming markets are overstating the scale of the rate hikes to come, we’re not looking at massive tightening cycles here. So here’s my point: hiking rates today might, in hindsight, not look like the smartest move – the jury’s out on that one. But hiking into a possible downturn is not the same thing as causing that downturn.
And in the grand scheme of, well, *gestures furiously at everything else that's happening right now*, two or three hikes really isn’t going to change the world. James Smith THINK Ahead in developed markets United States (James Knightley) Aug New Home Sales/Durable Goods Orders (Thu/Fri): It is a quiet week for data in the US, with housing numbers under pressure thanks to elevated mortgage rates, while durable goods orders will be pinned down due to a weak set of order numbers from Boeing in August. The fact that there are only two FOMC members who believe the central bank won’t hike again this year suggests a broad hawkish repositioning has already occurred within the FOMC.
The focus will therefore be on individual Fed speakers as markets gauge the timing of the next potential interest rate hike. There are two more meetings this year. The first is 28 October, but we only have one round of jobs and inflation data between now and then; the proximity to the mid-term elections on 3 November could also prove a complicating factor.
Unless the September jobs numbers and inflation data are very hot – which would leave little choice on a hike – we suspect the Fed would prefer to wait until 9 December. Key events in developed markets Source: Refinitiv, ING "> Source: Refinitiv, ING Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more THINK Ahead Central banks Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download In this opinion No, central banks aren’t about to cause a recession THINK Ahead in developed markets Author James Smith Developed Markets Economist, UK James is a developed market economist, responsible for ING's view on the UK economy and Bank of England. He graduated from the University of Bath with a degree in economics and joined ING in 2015.
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