The Federal Reserve could raise interest rates to 3.5% by the middle of next year to curb spiralling inflation, tipping the world economy into a recession, according to the Economic Strategy Unit of Tisco Financial Group (Tisco ESU).
Komsorn Prakobphol, head of Tisco ESU, said the Fed is rolling out rate hikes to curb rising inflation, which is partly attributed to the Russian invasion of Ukraine.
Recently the interest rate futures market suggested the Fed may raise interest rates to 3% by the end of this year and 3.5% by the middle of next year.
If the rate hikes go as expected, this cycle would be the most dramatic in more than 30 years and a major risk factor in leading the global economy towards a severe recession, according to the think tank.
Tisco ESU conducted a study of the Fed's rate hikes since 1965 and found eight out of the 11 led to a recession.
The Fed successfully controlled inflation without putting the economy into recession through its rate hikes in 1965, 1983 and 1993, when interest rates were raised during periods of lower inflation (less than 4%).
With the current global inflation rate at 8%, there is a high possibility the central bank's rapid rate hikes will lead the world into economic recession, Mr Komsorn said.
Tisco ESU expects the stock market to respond negatively to the rapid rate hikes.
According to the study, the S&P 500 moved to and stayed in negative territory throughout the interest rate hike periods in 1968, 1973, 1980, and 1984, when the Fed raised interest rates by more than 200 basis points in the span of just six months.
In addition, in terms of value, the stock market today is starting to be expensive compared with bond yields, which are now rising.
The earning yield gap, which tracks the difference between dividends from stocks and yields from government bonds, dropped to 2.7%, the lowest since 2007.
Based on these factors, Tisco ESU recommends investors reduce risky assets in their portfolios and look for other assets that do not fluctuate based on changing economic conditions, including equities of businesses engaged in mega-trends such as medical innovation, said Mr Komsorn.