Recession Odds Jump As The Fed Crushes Consumers

Recession odds have climbed considerably since Jerome Powell’s testimony before Congress and the latest FOMC meeting. However, the recent failures of Silicon Valley Bank (SVB) and Credit Suisse (CS), as higher rates impact regional bank liquidity, also added to the risks.

This isn’t the first time we have warned the aggressive rate hiking campaign would either cause a recession or “break something.”

You get the idea. We have been warning of the risk for quite some time. However, the financial markets continue to ignore the warnings.

The Fed remains abundantly clear that it still sees inflation as a “persistent and pernicious” economic threat that must be defeated. As we noted previously, the problem is that in an economy dependent on debt for economic growth, higher rates eventually lead to an “event” as borrowing costs and payments increase.

Graph showing 'Why Rates Can't Rise Much' from 1980 to 2022.

As debt service increases, it diverts money from consumption which fuels economic growth. Such is why consumer delinquencies are now rising due to the massive amount of consumer credit at substantially higher rates. Notice that when the Fed begins cutting rates, delinquencies decline sharply. This is because the Fed has “broken something” economically, and debt is discharged through foreclosures, bankruptcies, and loan modifications.

Graph showing 'The Fed Always "Breaks Something"" from 1996 to 2022.