Preparing Organizations in the Midst of a Storm

Risk, Reality and Reward: A Navigation Playbook

If the last 40 years of rate hikes are any indication of what lies ahead, there is about a 75 percent likelihood that multi-incident rate increases will trigger recessionary events.

The private equity industry has been facing challenges from the pandemic with travel restrictions, labor shortages and supply chain issues disrupting the global economy for two years.  More recently, the attention has shifted to managing inflationary pressures and assessing potential risks associated with global uncertainty.  While many private equity firms and their management teams continue to maneuver through the inflation surge, now is the time to look further over the horizon to consider additional actions to be taken in advance as preparation for additional inflation and economic pressure will soon be signaled by Federal Open Market Committee (FOMC) rate hikes. 

While no one is breaking news to note the Fed’s recent turn to tighten the money supply and reduce liquidity from an overheating economy, the pace of inflation and the accelerating hawkishness of the FOMC members have caught many by surprise.  Last November, the Fed was attributing inflationary pressures to “transitory” supply chain disruptions.[1] By December, markets were predicting three rate hikes in 2022. More recent expectations indicate up to five hikes.[2] What follows this near-term inflationary period could be a significant economic downturn in late 2022 or early 2023.

If the last 40 years of rate hikes are any indication of what lies ahead, a recessionary environment could be imminent.  Since 1971, there have been 20 periods of rate hikes by the FOMC, each of which has been driven mostly by inflation and geopolitical uncertainty.  Out of these 20 periods, 11 of them included three or more specific increases in rates and, out of those 11, eight (or 73 percent) led to recessions and bear markets.  In other words, using the last 40 years as a proxy, there is about a 75 percent likelihood that multi-incident rate increases trigger recessionary events.

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[1] “Transcript of Chair Powell’s Press Conference”, November 3, 2021,  https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20211103.pdf

[2] Countdown to FOMC: CME FedWatch Tool (cmegroup.com)

Thank you to Brett Odom, Darren Alcorn, and Jake Shure for contributing to this article.

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