Is the US government hoping for an economic recession?
In 2025, the US will have $9.2 trillion in debt maturing or needing to be refinanced. Faced with this massive refinancing, the fastest way to lower interest rates may be to trigger an economic recession.
However, can the US benefit from a market collapse?
Over the past two months, the 10-year Treasury yield has fallen by about 60 basis points. This is partly due to market expectations of reduced government efficiency sector deficit spending. But it is also related to increased uncertainty and the rising likelihood of a US economic recession.
A recession can almost guarantee a rate cut.
But why does a recession mean lower interest rates?
Since the 1980s, every US economic recession has occurred after the federal funds rate reached a peak. When economic growth stagnates, the Federal Reserve will respond by "stimulating" the economy. This means lowering interest rates to reduce the cost of capital and promote consumption.
Since the trade war began, the US economic growth outlook has declined significantly. At the same time, oil prices have fallen to a new 6-month low. Interestingly, President Trump has repeatedly stated that he hopes to reduce inflationary pressures by lowering oil prices.
On January 25, President Trump claimed he had a solution to the Federal Reserve's over 3-year battle against inflation. He demanded that the Organization of the Petroleum Exporting Countries (OPEC) lower oil prices and called for global interest rate cuts.
However, the fastest way to lower oil prices is likely through an economic recession that reduces demand.
In a recent interview with Fox News, President Trump mentioned that lowering interest rates would be a priority for him.
He stated: "Interest rates are coming down... I also hope to see energy prices come down." This quote is from a report by @amitisinvesting.
Next, let's look at the inflation data.
US consumers believe the inflation rate 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 delayed, but interest rates are falling.
The market is pricing in an economic recession.
In a trade war with soaring inflation, a significant rate cut is almost impossible without triggering an economic recession. Furthermore, on March 6, President Trump stated that he is not at all focused on the stock market. However, the reality is that, as we saw during his first term, Trump has always been focused on the market.
President Trump's statement of "not focusing on the market" is quite significant.
Given his apparent focus on the market, this is actually a signal he is sending to Wall Street, indicating his willingness to lower interest rates and reduce trade deficits at all costs, even if it means potentially triggering an economic recession.
Amid the chaos of the trade war, we have seen a significant decline in economic growth expectations. Last week, the Atlanta Fed lowered its Q1 2025 GDP growth forecast to as low as -2.8%. As a result, we have seen a sharp rise in market expectations for rate cuts last week.
Is this intentional?
High interest rates are the biggest problem facing the US government.
With rising interest rates, the cost of debt interest has increased significantly. Currently, the average interest rate on the US $36.2 trillion in debt is 3.2%, the highest level since 2010. The US government needs lower rates more than anyone.
And rate cuts are imminent:
The $9.2 trillion in US debt maturing is mainly concentrated in the first half of 2025, with 70% of the debt needing to be refinanced between January and June 2025.
The average interest rate on this debt is expected to rise by about 1 percentage point.
Additionally, efforts to reduce the US deficit will not happen overnight.
In fiscal year 2024, US spending is expected to reach $7.8 trillion, while revenue is only about $5.0 trillion. This means the US has $1.56 in costs for every $1 in revenue generated. The cloud of a debt crisis will loom over the US for a long time.
These major changes in the macroeconomic backdrop will have broad implications for the entire market, and we are and will continue to capture opportunities from them.
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Finally, let's go back to 2023, when the Federal Reserve was almost calling for a recession to lower inflation.
In February 2023, much research suggested that a recession may be the only solution. The Fed then shifted to a "soft landing" narrative, but this strategy has yet to successfully lower rates.
The reality is that the US debt crisis is the most severe but most overlooked crisis. While President Trump has recognized this, it may be too late. A recession may be the only solution to lower interest rates.
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