The next recession won't come from a credit crunch

The Fed has been able to stave off one of the most common catalysts for a downturn

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The S&P 500 is back above 5,200.

On Thursday, the index touched its highest mark since the start of April.

Investors celebrated the fresh jump in jobless claims because the data suggest higher odds for the Fed to cut interest rates this year.

In theory, the sooner the Fed loosens policy, the lower the likelihood of a recession.

As markets showed yesterday, investors love that calculus.

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No sign of crunchy credit

Investors like the idea of the Fed cutting interest rates because history suggests that’s a safe thing to want.

The lower the rates, the lower the odds of a credit crunch.

In a scenario where even borrowers with great credit get turned down for loans, usually a recession follows. 

Most credit crunches occur after inflation runs hot and the central bank responds by either:

  • Raising rates too fast

  • Holding rates high for too long

As far as policy, those conditions seem to be in place today.

Yet the Fed’s latest survey of loan officers suggests the bad news stops there.

“Not only has the economy remained robust, but we've had roughly two years to grow accustomed to higher interest rates,” said Eric Wallerstein, chief markets strategist for Yardeni Research.

Banks first cranked up lending standards a couple years ago as the Fed began hiking rates. Wall Street at the time saw a credit crunch and recession as a given.

But somehow, even though lending standards haven’t eased, domestic banks are seeing an uptick in loans to start the year.

Demand is back, and both consumers and corporations seem to have acclimated to a high-rate, high-lending standards environment.

Banks are indeed getting more comfortable with borrowers’ creditworthiness — the opposite of what usually happens in a credit crunch, according to Wallerstein.

“We see credit crunches as the primary method through which Fed hikes have caused recessions in the past,” he said, adding that “there’s been no crisis in this cycle” save for the regional bank collapse last March.

What’s particularly odd this time, however, is that inflation has indeed moderated over the last two years — with neither a credit crunch nor recession.

“There's lots of cumulative price increases baked into the economy, which understandably many consumers are upset about — we see it in sentiment readings and overhear it at the grocery store,” Wallerstein said.

“But on a rate of change basis, prices are heading where the Fed wants them to.”

In any case, when it comes to a potential recession, plenty of forecasters have recently quipped, “this time is different.”


So far, the lack of a credit crunch seems to support that adage. 

Then again — when it comes to economic chatter, words become punchlines not when they turn out to be true, but when things go wrong.

*At a glance:

*Data as of Thursday 10:30 p.m. ET


  • The Bank of England didn’t move interest rates. It left its key rate at 5.25%, but signaled that a cut could follow as soon as June. (WSJ)

  • Inflation may need “more time” to fall, according to San Francisco Fed President Mary Daly. She said recent hot data underscores why the central bank still cannot cut rates. (Bloomberg)

  • The US could weaken the dollar for economic gains. The resilient buck is good news for Americans traveling abroad, but US trade partners take a hit. Some analysts see a softer greenback as a way to compete with China. (Business Insider)


  • Airbnb stock dropped 7% despite upbeat Q1 earnings (Yahoo Finance)

  • Oil prices are on track for a weekly gain (Reuters)

  • Argentina’s president has guided inflation from 300% to 11% (The Pomp Letter)

  • Apple is set to power AI tools with in-house tech this year (Bloomberg)

  • Bridgewater’s new boss has “rewired” the legendary hedge fund (FT)

Last thing:

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