Unfortunately, higher interest rates will negatively affect the previously mentioned debt service ratio. But because households are, generally speaking, in such good shape right now (9.3% debt service ratio), they have a bit of a cushion to withstand higher rates. Additionally, elevated interest rates will slow down spending because borrowing money will become more expensive.
The Fed will try to avoid hiking us into a recession as the committee intentionally slows down the economy. But, while it might not happen this year, because it’s a part of the normal business cycle, at some point in time, we will fall into a recession. After all, there have been 17 recessions in the past 100 years, which means they are hardly rare occurrences. Fortunately, after every recession, the US economy has emerged stronger than ever.
As you can likely guess, the financial plumbing that connects markets and the economy is much more complex than the high-level view I’ve described in this brief analysis. That’s why we constantly monitor numerous indicators to determine the chance of a recession, the depth of any potential slowdown, and how to best position your investments against the widest range of potential outcomes.
June 10, 2022
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