Personal Wealth Management / Expert Commentary

Is the Fed Trying to Trigger a Recession? Ken Fisher Answers

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher explains how investors who believe that the US Federal Reserve wants to create a recession by raising interest rates to fight inflation may be misguided. According to Ken, interest rate hikes aren’t likely to trigger a US recession. While increasing rates has historically been an effective tool to combat rising inflation, there are key differences in today’s economic environment that make this approach less effective. For example, bank lending is currently robust, which does not historically correlate with a recessionary environment.

Ken explains how costs associated with banks’ loan base—the money they are able to lend—have declined significantly in recent decades, likely as bank reserves have increased dramatically and lowered competition for deposits. As the Fed raised rates this year, the spread has widened between the rate banks charge on loans and the cost of their loan base—making lending more profitable. According to Ken, until something comes along to dis-incentivize loan growth, Ken thinks we are unlikely to see a recession.

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Ken Fisher: So, people this year, as I think you intuitively guess, know here have a lot of consternation about all of the interest rate hikes led by the US Federal Reserve System and what that does potentially to the economy. Some people have said that the Fed is wanting to, and I quote “knee cap” unquote the economy, the create a recession or a weak economy to fight off inflation.

Ken Fisher: I'm just going to say to you that it kind of misses the boat on what it is that banks and monetary policy really function as. The concept of that, I understand why people believe that. The concept of it in many times in the past has worked to do that some way, somehow. But it's different in two important ways now. And I've talked about this. I've written about this. The loan base that banks use to base loans on traditionally was pretty expensive for them. In last couple of decades, it's trended cheaper and cheaper and cheaper and today cost them almost nothing. They're so flush with reserves, not only in America but largely around the world, not everywhere but mostly, that they don't need to compete for reserves, their loan base is in America. Their loan base is 93% zero cost.

Ken Fisher: And so, what happens when the Federal Reserve raises short term interest rates otherwise, is that it actually increases the spread between that zero-cost base that the banks have on their loan base and the rate that banks can charge to make a loan to somebody. And it actually makes them because it increases that spread, more incentivized to lend, more eager to lend. And in America as I speak, the monthly and year over year growth of loans in America has been eleven and a half percent. It's gangbusters. The fact of that is, that there is just no history and no logic to a recession actually occurring while the growth in loans is so robust. Because when borrowers are borrowing, they're borrowing and they're going to spend pretty fast. People don't borrow money and socket away. They borrow money and they spend.

Ken Fisher: So, from that, you actually get the feature that what they're doing doesn't really help inflation so much. And I've talked otherwise about why inflation is going to get better anyway, because the input cost to inflation were sometime back and people worry about inflation because it's an output cost, not an input feature. But that's a whole different discussion. The fact is now we're unlikely to see that “kneecapping.” We're unlikely to see a recession unless something comes along to make that loan growth go far weaker than it is now. And for you that should be a relatively happy thing.

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A series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

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