Broker Check
When Do Rates Start Rising After a Recession?

When Do Rates Start Rising After a Recession?

August 25, 2020
Share |

As the economy begins to recover, with the early stage more robust than expected, we increasingly get asked when interest rates will move meaningfully higher. As shown in the LPL Chart of the Day, historically rates don’t start to move higher until a median of about two years after a recession starts, and five of the last seven recessions were at least 20 months.

“The first month of this recession was back in March, so historically you would expect rates to stay stable or even fall until early 2022,” said LPL Financial Chief Market Strategist Ryan Detrick. “But with a short recession, progress on treatments or a vaccine helping to address the recession’s underlying cause, and massive fiscal and monetary stimulus, we expect to be on the shorter end of history this time around.”

View enlarged chart.

Yield levels are generally driven by three things: 1) economic growth; 2) inflation; and 3) central bank policy. Stocks, at least, seem to be signaling a strong return to economic growth and are one piece of evidence showing how time has become compressed for this particular recession. The S&P 500 Index has already set a new all-time high, taking just five months to recover, compared with an average of 30 months for bear markets during recessions (5 Charts to see with Stocks at All-Time Highs).

Stimulus could certainly add to inflationary pressure, but it will take time for the economy to return to full capacity, including employment levels, which will likely limit inflation in the intermediate term. While our longer-term inflation expectations have moved higher, intermediate term concerns remain limited.

What’s most likely to extend the low rate period? The Federal Reserve (Fed) is likely to stay on hold for some time, and is exploring a revised policy framework that may even let inflation run a little hot before it starts raising rates. (Watch for more headlines around the revised policy framework when Fed Chair Jerome Powell speaks at the virtual Jackson Hole symposium later this week.) But policy also includes bond purchases, and even the possibility that purchases would start to wind down helped push rates higher in the last expansion. Still, overall, we expect the Fed to try to anchor rates for some time.

So much about this recession is occuring in a compressed time frame, and we expect the start of a move higher for the 10-year Treasury yield to follow suit. But given how long it’s taken historically for interest rates to start to reverse after recessions and the time it will take for the economy to return to full potential and inflationary pressures to start to build, we expect any move higher to be measured in the near term.

IMPORTANT DISCLOSURES This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index and market data from FactSet and MarketWatch. This Research material was prepared by LPL Financial, LLC. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity. Not Insured by FDIC/NCUA or Any Other Government Agency, Not Bank/Credit Union Guaranteed, Not Bank/Credit Union Deposits or Obligations, May Lose Value, For Public Use – Tracking 1-05047946.