Does the United States intentionally 'want' a recession?

The Kobeissi Letter

Original compilation: Shenzhen TechFlow

Does the US government expect an economic recession to occur?

By 2025, the United States will have $92 trillion of debt maturing or needing to be refinanced. Faced with this massive refinancing, the quickest way to lower interest rates may be to trigger an economic recession.

However, can the United States benefit from the market crash?

Over the past two months, the yield on 10-year government bonds has fallen by about 60 basis points. This is partly due to market expectations of reduced deficit spending in government efficiency departments. However, it is also related to increased uncertainty and the rising possibility of a U.S. economic recession.

Economic recession almost guarantees a rate cut.

However, why does an economic recession represent a decrease in interest rates?

Since the 1980s, every U.S. economic recession has occurred after the federal funds rate peaked. When economic growth stagnates, the Fed responds by 'stimulating' the economy. This means lowering the cost of capital and promoting consumption by lowering interest rates.

Since the trade war began, the U.S. economic growth expectations have dropped significantly. Meanwhile, oil prices have also fallen to a new 6-month low. What's more interesting is that President Trump has repeatedly expressed his wish to reduce inflation pressure by lowering oil prices.

On January 25, President Trump claimed to have a solution to the more than 3-year-long fight against inflation by the Federal Reserve. He called for the Organization of the Petroleum Exporting Countries (OPEC) to lower oil prices and urged a global interest rate cut.

However, the fastest way to lower oil prices is most likely through an economic recession that reduces demand.

President Trump recently mentioned in an interview with Fox News that he would prioritize lowering interest rates.

He said, "Interest rates are falling... I also hope to see energy prices fall." This statement comes from the report by @amitisinvesting.

Next, let's take a look at the inflation data.

American consumers believe that the inflation rate will rise to +6.0% in the next 12 months, the highest level since May 2023. This marks the third consecutive month of rising inflation expectations.

Inflation is on the rise, rate cuts are delayed, but interest rates are falling.

The market is pricing in an economic recession.

In the inflationary trade war, a sharp reduction in interest rates is almost certain to trigger an economic recession. In addition, President Trump stated on March 6 that he was not paying attention to the stock market at all. The fact is, as we have seen in his first term, Trump has always been focused on the market.

President Trump's statement of "not paying attention to the market" seems meaningful.

In what he clearly pays attention to the market, this is actually a signal he is sending to Wall Street, representing his willingness to lower interest rates and reduce trade deficits at all costs, even if it means potentially triggering an economic recession.

In the chaos of the trade war, we see a sharp decline in economic growth expectations. The Atlanta Fed last week lowered its GDP growth forecast for the first quarter of 2025 to as low as -2.8%. Therefore, we see market expectations for rate cuts sharply rising last week.

Is this intentional?

High interest rates are the biggest problem facing the US government.

With the surge in interest rates, the cost of debt interest has increased significantly. Currently, the average interest rate on the $36.2 trillion U.S. national debt is 3.2%, hitting the highest level since 2010. The U.S. government needs a rate cut more than anyone else.

Moreover, the rate cut is imminent:

The maturity of the US $9.2 trillion debt is mainly concentrated in the first half of 2025, and 70% of the debt needs to be refinanced from January to June 2025.

The average interest rate on these debts is expected to rise by about 1 percentage point.

In addition, the efforts to reduce deficit spending in the United States will not be accomplished overnight.

In the 2024 fiscal year, the United States spent as much as $7.8 trillion, while income was only about $5.0 trillion. This means that for every $1 of income generated in the United States, there are $1.56 in costs. The shadow of a debt crisis will linger over the United States for a long time before dissipating.

These major changes in the macroeconomic background will have a wide impact on the entire market, and we are and will continue to capture opportunities from it.

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Finally, this brings us back to 2023, when the Fed was on the verge of calling for an economic recession to bring down inflation.

In February 2023, many studies suggested that an economic recession might be the only solution. Subsequently, the Fed shifted its narrative to a "soft landing," but this strategy has not yet successfully lowered interest rates.

The reality is that the U.S. debt crisis is currently the most serious but overlooked crisis. Although President Trump has realized this, it may be too late. An economic recession may be the only solution to lower interest rates.

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