Higher For Longer Interest Rates May Rattle Markets

Posted June 29, 2023

This week Macro Watch examines the most recent trends in Credit Growth.

It focuses on two important developments revealed in The Financial Accounts Of The United States for the first quarter of 2023:

• The abrupt slowdown in Household Sector Debt, and 
• The record-setting expansion of GSE Debt during the quarter.

Both these developments would normally suggest a high probability of the US going into Recession in the near term.

Typically, if Total Credit adjusted for Inflation grows by less than 2% a year, the US economy falls into Recession.  

Currently, however, that is not happening.  Total Credit adjusted for Inflation has increased by less than 2% for the last eight quarters, but the economy continues to expand, job growth remains strong, and Inflation remains stubbornly above the Fed’s 2% inflation target.  Core PCE Inflation, the measure of Inflation that the Fed watches most closely, is still up 4.7% from one year ago.

This unusual divergence between weak Credit Growth and solid Economic Growth appears to have been caused by the unprecedented surge in savings brought about by government stimulus during the pandemic. 

If this divergence persists, interest rates may have to move up even more than the 50 basis points that the Fed suggested would be necessary before year-end.

The stock market is not prepared for the possibility of the Federal Funds Rate moving up to 6%. If it does, stocks could be in for a painful correction during the months ahead.  Meanwhile, property prices should be expected to continue to deflate well into next year.

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