It will be nearly impossible for the North American economy to avoid a recession because interest rates will have to rise much higher to quell inflation, according to the head of fixed income at Bank of Montreal’s fund management division. 

“The likelihood of a recession is 99.9 per cent,” Earl Davis said Wednesday on BNN Bloomberg Television. “Why do I say that? The central bankers actually want a recession.”

Davis, who’s chief of fixed income and money markets at BMO Global Asset Management, said a recession could easily drag into 2024. It won’t necessarily be a mild contraction, he said, because unlike past hiking cycles such as in 2018, the Federal Reserve and other central banks are far behind the inflation curve -- and rates will have to stay higher for longer to cut demand. 

 “It may end up being a policy mistake. But the playbook says you have to get a recession” to reduce inflation to acceptable levels, Davis said. “That is the key thing that the market has to get through.”

Treasury two-year yields were above 4 per cent early Wednesday afternoon, the highest since 2007, as traders waited for the Fed’s policy decision and latest economic projections.