The Rising Financial Burden, The Irreparable Damage of the Fed's Interest Rate Policy, and the Looming Recession:

Rising Financial Pressure and the Looming Recession: An Overview

Since 2018, the financial landscape in the United States has changed dramatically. While the average monthly mortgage payment was around $1,250 a few years ago, today that amount has skyrocketed to an astonishing $22,200. Personal interest payments have also nearly doubled, now totaling $500 billion per year. This rapid increase in financial burdens has placed immense pressure on many households, which is clearly reflected in the rising consumer delinquencies.

In the past year, consumer delinquencies have risen faster than at any point since the 2007 financial crisis. Although delinquency rates are still below their 2008 peak, a simple extrapolation of current trends suggests that default rates could reach 2008 levels by next year. This indicates that a growing number of people are struggling to meet their debt obligations – a worrying trend that can be traced back to the Federal Reserve's interest rate policies.

The Impact of the Federal Reserve’s Interest Rate Hikes

In recent years, the Federal Reserve has steadily raised interest rates, causing rates to rise across the economy – from mortgage rates to corporate and credit card interest rates, the latter of which have recently hit record highs. Higher interest rates make borrowing more expensive for corporations, individuals, and even the government. Given that the U.S. economy is largely credit-based, this almost invariably leads to economic downturns.

A growing number of economists are now calling for the Federal Reserve to cut interest rates to counter the increasing economic weakness. The key question is no longer whether the Fed will cut rates, but rather by how much these cuts will be and whether they will be sufficient to prevent a recession. However, some experts warn that the damage may already be done, and that the U.S. could still slide into a recession over the next twelve months.

Price Stability vs. the Fed's Employment Mandate

The Federal Reserve has two primary mandates: price stability and full employment. While price stability has been largely maintained in recent months, the employment mandate is increasingly being called into question. Over the past year, the unemployment rate in the U.S. has risen at the fastest pace since the COVID-19 pandemic and the 2008 financial crisis. However, Fed Chair Jerome Powell has made it clear that he does not wish to see further weakening of the labor market. Should the labor market continue to cool, interest rate cuts may follow.

Looming Recession: What the Financial Markets Are Saying

While financial markets were betting earlier this year on a low probability of rate cuts, this likelihood has now increased to 40%, according to recent market data. This shift reflects growing expectations that the Federal Reserve will reduce rates to support the economy. However, it remains uncertain whether these measures will be enough to stave off a recession. Over the last few decades, the Federal Reserve has only once – in 1995 – successfully avoided a recession through timely rate cuts. Whether the Fed can once again keep the economy on track remains to be seen.

The Role of Consumers and the Challenges Ahead

Of particular concern is the rise in consumer delinquencies. Data shows that there is typically a delay of around 18 months before interest rate hikes fully impact the economy. This means that the current high rates will likely continue to pressure consumers, pushing delinquency rates higher into 2025.

This underscores one of the key lessons from economic history: monetary policy works with a lag. The famous economist Milton Friedman noted that the effects of monetary policy have "long and variable lags." It could take until at least mid-2025 for the full economic impact of today's rate hikes to become apparent.

Conclusion: Navigating an Uncertain Future

The U.S. economy faces a challenging period ahead. Despite the continued strength of stock markets, which have posted extraordinary gains in recent years, a recession in the coming months may be inevitable. While the markets have so far remained optimistic, many consumers are less so, as rising delinquencies and a weakening labor market point to an impending slowdown.

Whether the Federal Reserve’s rate cuts will come in time to stabilize the economy or whether the damage is already irreparable remains to be seen. What is clear is that the next few years will bring significant economic and financial upheaval – a challenge that will require strategic adjustments from both businesses and individuals alike.