Betting there’s a 99.9 per cent chance of a U.S. Federal Reserve-induced recession is “extreme in terms of a probability”, said Ed Devlin, former head of Canadian portfolio management at PIMCO, one day after a top Bay Streeter made waves with his prognostication. 

“I mean, put it this way: that’s saying it's one-in-1000 (chance there won’t be a recession,)” Devlin added in an interview Thursday.

“I'd be more than happy to bet anybody or give anybody $100 it when there's a recession, if you'll give me $100,000 when there’s not. You know, it seems a little bit extreme in terms of a probability.”

RISK OF U.S. FED-INDUCED RECESSION

In an interview Wednesday morning, Earl Davis, BMO Global Asset Management’s head of fixed income, said it will be almost impossible to avoid a recession, as the U.S. Federal Reserve­ continues with its aggressive rate-hike strategy in an attempt to get inflation under control.

“The likelihood of a recession is 99.9 per cent,” he said.

“Why do I say that? The central bankers actually want a recession.”

Davis said that “it may end up being a policy mistake. But the playbook says you have to get a recession” in order to get inflation back to manageable levels.

Devlin said although he thinks a recession is “more likely than not,” he placed the odds of it happening at about two-thirds or three-quarters.

“We all know that monetary policy works with a 12-to-18-month lag before you really find out the effect on the economy, yet I don't think central banks politically can sit around if they think they've done enough tightening and they want to wait. Normally they would wait and see, you know, the impact of the tightening on the economy,” said Devlin, who is the founder and managing partner of Toronto-based investment firm Devlin Capital.

“I think that they don't have that luxury this time around. They're being forced into hiking rates, just you know, if spot inflation is substantially above their target.”

POWELL SIGNALS MORE PAIN TO COME

On Wednesday, the U.S. Federal Reserve hiked the target for its main policy rates three-quarters of a point for a third consecutive time. 

During a news conference, U.S. Federal Reserve Chair Jerome Powell signalled there will be more hikes, and again acknowledged the central bank’s moves will cause pain for some Americans.  

“We've just moved I think probably into the very lowest level of what might be restrictive and, certainly in my view and the view of the committee, there's a ways to go,” Powell said.

Central banks across the globe have been racing to lift their policy rates as persistent supply-demand imbalances fuel runaway inflation.

This week alone, rates were raised by central banks in the U.K., Philippines, Switzerland, Norway and Sweden

'INNER PAUL VOLCKER'

Devlin said he thinks central banks are channeling their ‘inner Paul Volcker’, the former U.S. Federal Reserve chair who tackled high levels of U.S. inflation in the 1970s and 1980s at the expense of economic growth.

“What I mean by that is when faced with stagflation, what you do is fight inflation and then worry about growth later,” Devlin said.

“The good news, at least for now, is that as policy rates are creeping up towards four per cent, if and when the central bank realizes a recession is upon us and inflation may be coming down more rapidly than they forecast, they can always cut rates. At least they got some room to cut.”

However, Devlin said the worst-case scenario would be if “they drag their feet too much with very high interest rates.”