Original author: The Kobeissi Letter
Original translation: TechFlow
Is the US government expecting a recession?
In 2025, the United States will have $9.2 trillion in debt maturing or needing to be refinanced. Faced with this massive refinancing, the quickest way to lower interest rates may be to trigger a recession.
But can the United States benefit from a market crash?
In the past two months, the 10-year Treasury yield has fallen by about 60 basis points. This is partly due to market expectations of cuts in deficit spending in government efficiency sectors. But it is also related to increased uncertainty and the rising probability of a US recession.
A recession almost ensures a rate cut.
So why does a recession mean lower interest rates?
Every U.S. recession since the 1980s has occurred after the federal funds rate peaked. When economic growth stagnates, the Fed responds by stimulating the economy. This means lowering interest rates to reduce the cost of capital and boost consumption.
Since the start of the trade war, US economic growth expectations have fallen sharply. At the same time, oil prices have also fallen to a new 6-month low. Whats more interesting is that President Trump has repeatedly stated that he wants to reduce inflationary pressures by lowering oil prices.
On January 25, President Trump claimed he had the solution to the Federal Reserve’s more than three-year battle against inflation. He asked the Organization of the Petroleum Exporting Countries (OPEC) to lower oil prices and called for lower interest rates around the world.
However, the quickest way to lower oil prices is most likely through a recession that reduces demand.
President Trump made lowering interest rates a priority in a recent interview with Fox News.
“Interest rates are coming down…I’d also like to see energy prices come down,” he said, according to a report from @amitisinvesting .
Next, let’s look at the inflation data.
U.S. consumers believe inflation will rise to +6.0% over the next 12 months, the highest level since May 2023. This marks the third consecutive month of rising inflation expectations.
Inflation is rising, rate cuts are being delayed, but interest rates are falling.
The market is pricing in a recession.
In the midst of a trade war with soaring inflation, it is almost impossible to slash interest rates without triggering a recession. Moreover, President Trump said on March 6 that he was not paying attention to the stock market at all. The fact is, as we have seen throughout his first term, Trump is always paying attention to the market.
President Trump’s statement of “not paying attention to the market” is very meaningful.
With his eyes clearly on the market, it was effectively a signal to Wall Street that he was willing to do whatever it took to lower interest rates and reduce the trade deficit, even if it meant potentially sparking a recession.
Amid the chaos of the trade war, we have seen economic growth expectations fall sharply. The Atlanta Fed last week cut its GDP growth forecast for the first quarter of 2025 to as low as -2.8%. As a result, we have seen market expectations for rate cuts rise sharply last week.
Is this intentional?
High interest rates are the biggest problem facing the US government.
The cost of paying interest on debt has increased dramatically as interest rates have soared. The average interest rate on the US $36.2 trillion in national debt is now 3.2%, the highest level since 2010. The US government needs a rate cut more than anyone.
Moreover, a rate cut is imminent:
The maturity of the United States $9.2 trillion debt is mainly concentrated in the first half of 2025, and 70% of the debt needs to be refinanced between January and June 2025.
The average interest rate on these debts is expected to rise by about 1 percentage point.
Moreover, the United States efforts to cut deficit spending will not happen overnight.
In fiscal year 2024, the U.S. will spend $7.8 trillion, while revenue will be only about $5.0 trillion. This means that for every $1 of revenue generated by the U.S., there will be $1.56 in costs. The cloud of the debt crisis will hang over the U.S. for a long time before it dissipates.
These significant changes in the macroeconomic backdrop will have broad-based impacts across the market, and we are and will continue to capture opportunities from them.
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Finally, this brings us back to 2023, when the Fed almost starts calling for a recession to reduce inflation.
In February 2023, many studies suggested that a recession might be the only solution. The Fed then switched to a “soft landing” narrative, but this strategy has so far failed to successfully lower interest rates.
The reality is that the US debt crisis is the most serious and yet most neglected crisis of our time. Although President Trump has realized this, it may be too late. A recession may be the only solution to lower interest rates.
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