financial market participants appeared to be losing hope that the world’s largest economy can avoid a downturn a day after the federal reserve left little doubt about its willingness to continue aggressively hiking interest rates to curb inflation leaving traders to contemplating a onceunthinkable 5 level for borrowing costs in the next six months “our view is that a fedfunds rate of 4 is about the highest that the economy would be able to withstand and the fed is clearly threatening to raise rates above that level” said mark haefele chief investment officer at ubs global wealth management  amid a worldwide march higher in rates which also included hikes by the bank of england and central banks of switzerland and norway major stock indexes from us to europe and asia were mostly a sea of red as investors and traders factored in a decent chance of a 5 fedfunds rate target next year twice as high as where rates were prior to the fed’s policy announcement on wednesday in the us stocks extended their losses after suffering a sharp wednesday decline government bonds aggressively sold off pushing 2 and 3year rates further above 4 and the us dollar seen as one of the few remaining havens in the current environment climbed further above its highest levels of the past 20 years as measured by the ice us dollar index dxy  meanwhile bondmarket indicators continued to flash warning signs through a deeply inverted treasury yield curve of the growing risk of a recession and analysts were skeptical that policy makers can avoid one for his part fed chairman jerome powell told reporters that “no one knows with any certainty where the economy will be a year or more from now” economist derek tang said “the ship has sailed” on the prospects of a soft landing while chris low of fhn financial called out a “fantasy element” in the fed’s economic forecasts which show the us economy strengthening in 2023 despite a fedfunds rate heading for 46 jefferies economists thomas simons and aneta markowska said “nobel prizes will be in order” if the fed can achieve its goal while avoiding a recession  ubs global wealth’s forecasts see a chance that inflation may fall low enough for the fed to possibly pause its ratehiking cycle after its december meeting haefele said in a note thursday “however if inflation does not come down as quickly as we expect and the fed raises rates closer to 5 it will be difficult to avoid a recession”  indeed traders were pricing in a 31 chance that the fedfunds rate target could get to between 475 to 5 by march up from 19 on wednesday and zero chance a month ago according to the cme fedwatch tool a slight chance was also seen that the target could get as high as 5 to 525 in six months versus the current level of 3 to 325 following the third straight 75basispoint increase  what’s more six out of the 19 officials on the policysetting federal open market committee indicated they think it would likely be appropriate to lift rates to between 475 and 5 next year according to the fed’s economic projections released wednesday bofa securities and deutsche bank have also flagged the chance of rates moving closer to 5 a level that hasn’t been seen in over a decade   to be sure a 5 fedfunds rate is still not yet a universal view trader tom di galoma at seaport global holdings in greenwich conn argued that “inflation is going to subside dramatically by the beginning of next year or there will be geopolitical developments that are going to force the fed into some kind of pivot” read markets ignore putin’s nuclear saberrattling why that might change  still markets were aggressively readjusting their expectations for fed policy with the 2year treasury yield tmubmusd02y being one of the rates taking the brunt of the selloff in bonds more than any other rate along the treasury curve the 2year rate is “the most related to policy expectations” and offers “the purest call on what the fed is going to do” said tang an economist at monetary policy analytics in washington led by former fed governor larry meyer unlike the 10 and 30year rates the 2year is “not as tainted by term premiums and the supplydemand effect in which some people hold treasurys for strategic reasons” he told marketwatch  on thursday the 2year rate continued to climb toward a 15year high breaking past 41 along with the 3year yield as the 5year rate also moved higher in sympathy in the process the 2year yield exceed the yield on the 10year treasury note by as much as 59 basis points at one point deepening the inversion of that measure of the yield curve   the 2year yield matters because its relationship to the 10year is one of the ways in which the bond market can provide a relatively reliable warning of a future recession albeit with a lag in addition an inverted curve in which the 2year rate trades above its 10year counterpart has the potential to impact banks’ willingness to lend which in turn can bring down demand in the economy by making it more expensive to borrow and companies less willing to invest or hire   growing expectations for a 5 fedfunds rate would eventually be reflected in the 2year rate according to tang and if the fed brings such a level to fruition “that would be an unequivocal message to businesses to stop hiring stop poaching employees and stop raising wages” the economist said via phone “it would be a way to shut down the sort of revenge highspending streak people have been going on” since the pandemic began by making people feel less rich and would further hit the housing market and equities particularly shares of technology companies with future earnings that would be seen as less valuable by investors he said   indeed a continued rise in us mortgage rates is already taking its toll on housing sales the sp 500 index spx is in the midst of a slide described by bespoke investment group as the third leg down in the current bear market and the nasdaq composite comp  which led major us indexes lower on thursday was down 29 for the year as of afternoon trading  meanwhile an unruly rise in the us dollar has left currencies like the yen at the lowest levels in more than 20 years forcing japanese authorities to intervene in currency markets to buy their currency   against the current backdrop “we do not consider this an environment suitable for strong directional positioning on overall indexes” haefele of ubs global wealth wrote “but we advise against retreating to the sidelines especially given the drag on cash from high inflation and the challenge of timing a return to markets without missing out on rebounds instead we stay invested but also selective and focus our preferences on the themes of defensives income value diversification and security”