As central banks hold rates steady despite surging inflation, the CEO of the $6 billion hedge fund argues that a severe economic shock could force policymakers back below zero – and that hedge funds should be preparing now.
Central banks on both sides of the Atlantic held interest rates steady last week, even as inflation climbed well above target. The European Central Bank kept its deposit facility rate at 2% despite eurozone inflation reaching 3% in April, driven by a surge in energy costs linked to the conflict in Iran. The Fed maintained its benchmark rate at 3.5–3.75%, with US inflation at 3.3% – a nine-month high. In both cases, policymakers acknowledged the inflationary pressure but chose not to act, citing uncertainty over how long the energy shock would persist.
For most market participants, the question is whether central banks will be forced to hike. But last week in his newly inaugurated office, Francesco Filia, CEO of Fasanara Capital, asked a different question entirely: what happens when the next shock hits and policymakers have to cut – not to zero, but through it?
It is definitely a contrarian thesis, and Filia is under no illusions about how it sounds in an environment where markets are pricing in ECB rate hikes as early as June. But his argument is not about the next six months. It is about the structural fragility he believes is building beneath the surface of the global economy – and what it means for hedge funds when that fragility is eventually exposed.
The case for negative rates
Filia’s thesis rests on a simple observation: the global economy is running out of conventional tools. US debt held by the public has just crossed 100% of GDP for the first time outside of the Covid-era collapse, according to new data from the Committee for a Responsible Federal Budget. The Congressional Budget Office projects it will reach 120% by 2036. The UK’s debt-to-GDP ratio stands at around 94%, France’s at 115%. Across developed economies, the fiscal space to respond to the next downturn through government spending is narrowing.
At the same time, the structural pressures are intensifying. Ageing demographics are shrinking the working-age population across developed markets. AI-driven automation, Filia argues, could accelerate labour displacement in ways that traditional policy tools are not designed to address. And the frequency of supply-side shocks – from the pandemic to the current energy crisis – is compressing the intervals between periods of economic stress.
The trigger for negative rates, in Filia’s view, is not any single event but the inevitability of a recession severe enough to force central banks’ hands. He points to the historical record: NBER data shows the US has experienced roughly 30 recessions since 1857, with post-war expansions averaging around five years. The current expansion – setting aside the two-month Covid contraction in 2020 – is now six years old. The last recession that involved a sustained, significant decline in economic activity was the global financial crisis, which ended in June 2009 – over 16 years ago.
“The question is not whether a recession will happen,” Filia says. “It is whether the tools available to respond to it will be sufficient. And when you look at the debt levels, the demographic trajectory and the potential for AI-driven labour disruption, the answer is that conventional rate cuts may not be enough.”
The central bank bind
The immediate counterargument is obvious: how can central banks cut to negative territory when inflation is running above target? Filia acknowledges the tension but argues it is precisely the bind that makes negative rates plausible.
Central banks are already demonstrating their constraints. The ECB held rates last week despite inflation hitting 3% – its highest since September 2023 – because raising rates risks tipping a eurozone economy that grew just 0.1% in Q1 into contraction. ECB President Christine Lagarde acknowledged that policymakers discussed a hike “at length” but concluded they lacked sufficient information to act. The Fed, facing a similarly divided committee with four dissenting votes at its April meeting, is caught between persistent inflation and a growth rate that slowed to 2% annualised in Q1.
Ben May, macroeconomist at Oxford Economics, notes that this underlying fragility “naturally implies a higher statistical chance of a recession.” Thomas Pugh, economist at RSM, is blunter: “Economic data will weaken over the next few months, which will shift the focus back towards supporting growth rather than fighting inflation.” On the limits of policy responses, Pugh adds: “There’s very little that the Bank of England, or any central bank, can do about an energy shock. It can print more money, but it can’t produce more oil.”
Neither May nor Pugh is explicitly endorsing Filia’s negative rates thesis. But their analysis points to the same structural tension: central banks are constrained by inflation they cannot control through monetary policy, in economies that may not be resilient enough to withstand higher rates. If a genuine recession materialises on top of that, the conventional playbook is limited.
The inflation mistake
Filia’s argument also rests on a distinction he believes markets are not taking seriously enough: the difference between demand-driven inflation and supply-driven inflation.
“If inflation is coming from excessive demand, then higher rates are a logical response,” he says. “But if the problem is supply-driven – energy, food, insurance, rents, mortgages, car financing, basic living costs – then raising rates can become a policy mistake.”
The point is that the inflation experienced by households is already materially worse than the headline CPI basket suggests. For many middle-class families, the real cost of living includes not only food and energy, but also the cost of borrowing: mortgage payments in Europe and globally, auto loans and consumer credit in the US, and refinancing costs across the economy. These are not abstract financial variables. They are monthly cash-flow pressures.
In that context, further rate hikes risk adding insult to injury. A household already squeezed by higher food, energy, rent, mortgage and car-financing costs is not helped by even tighter monetary policy. It is pushed closer to the point of retrenchment.
That, Filia argues, is where the risk of a self-fulfilling recession begins.
Higher rates do not produce more oil, more gas, more housing supply, or cheaper food. But they do reduce disposable income, depress credit creation and accelerate the weakening of aggregate demand. If central banks overreact to supply-side inflation by tightening too aggressively, they may destroy demand faster than they bring supply back into balance.
“The danger is that policymakers fight the last inflation war,” Filia says. “They see inflation and instinctively Pavlovianally reach for higher rates. But if the inflation is not primarily demand-led, the cure can become the disease.”
The risk is that central banks overcompensate. By trying to suppress an inflationary shock they cannot fully control, they could force a sharper contraction in household spending, business investment and employment. In that scenario, the economy does not glide gently back to target inflation. It falls through the floor.
AI and the demand shock
Filia also sees AI as an underappreciated accelerant of this process.
AI may improve productivity over the long term, but in the transition period, it risks displacing workers faster than the economy can reabsorb them.
That matters for inflation and rates because displaced workers do not behave like productive capital. They cut spending, “AI agents do not buy groceries yet,” Filia says. The point is simple: if AI replaces jobs, the immediate macroeconomic effect may not be a productivity boom but a demand shock. Workers who lose income reduce consumption. Households that fear job losses increase savings. Companies facing uncertainty delay investment. The result is weaker aggregate demand at precisely the moment when households are already under pressure from elevated living costs and higher borrowing expenses.
This is central to Filia’s negative-rates thesis. A severe recession does not require one single catastrophic event. It can emerge from the combination of stretched households, high debt, expensive borrowing, supply-driven inflation, fiscal constraints and labour displacement from automation.
In that environment, further rate hikes could prove to be the wrong medicine. They would worsen the cash-flow pressure on households and companies, accelerate the decline in demand and increase the probability that central banks eventually have to reverse course dramatically.
The irony, Filia argues, is that the same central banks now reluctant to cut because inflation is above target may later be forced to cut far more aggressively because their own tightening helped bring forward the recession.
What it means for hedge funds
For hedge fund managers, the practical question is not whether negative rates are the most likely outcome but whether the scenario is probable enough to warrant positioning for it. Filia argues that it is – and that the implications for portfolio construction are significant.
In a negative rate environment, traditional fixed income becomes a drag rather than a ballast. Yields are eroded by the rate structure and outpaced by inflation, removing one of the primary sources of portfolio income. Filia argues that funds should be building exposure to structural income generated outside the central banking system – private credit, SME lending and other forms of direct lending where returns are contractual rather than rate-dependent.
That recommendation sits in interesting tension with the current state of private credit markets, which are facing a wave of redemptions, rising PIK facilities and growing hedge fund short interest. But Filia’s point is about the underlying asset – senior secured loans to operating businesses – rather than the fund structures currently under stress. The distinction matters: the opportunity he describes may emerge precisely because of the dislocation currently playing out in private credit vehicles.
Leverage, too, would come under pressure. Reuters reported at the end of 2025 that hedge fund gross leverage globally sat at nearly three times the size of their books. In a more fragile economic environment, Filia argues, maintaining these levels becomes unsustainable. The cheap financing that has fuelled leveraged strategies would evaporate, and funds reliant on financial engineering rather than genuine alpha generation would be most exposed.
“Funds will have to be creative in how they deploy capital,” Filia says. “The economic pressure may present new opportunities, but they will be in a more fiscally unstructured environment. The winners will be the ones that can generate returns without relying on the architecture of the current rate regime.”
A contrarian view, but not a fringe one
Negative interest rates remain a low-probability scenario in most market pricing. But Filia’s argument is not that they are imminent – it is that the structural conditions that would make them necessary are building, and that the hedge fund industry is not adequately prepared for that possibility.
The historical precedent exists. The ECB, Bank of Japan and several European central banks all implemented negative rates in the 2010s, and the experience was less catastrophic than many predicted. If the next downturn is severe enough – and if fiscal space is as constrained as current debt trajectories suggest – the policy toolkit may end up back in the same place.
Whether or not Filia’s thesis proves correct, the underlying observation is difficult to dismiss: the global economy is more indebted, more demographically constrained and more vulnerable to supply-side shocks than at any point in the post-war period. For hedge fund managers, the question is not whether to bet on negative rates but whether their portfolios can withstand the kind of regime shift that would produce them.
