The Fed has not raised rates, but markets already tightened financial conditions through stocks, yields, mortgages, and consumer debt costs.
KEY TAKEAWAYS
The Fed has not changed the Fed Funds rate since cutting three times last year, but financial conditions have tightened anyway. Markets have effectively delivered restraint without a new policy move.
A decline in equities is already creating a negative wealth effect. Falling asset prices can reduce confidence and spending even for households that are not actively trading stocks.
Treasury yields have risen off their lows, and mortgage rates have climbed back above 6.4%. That has worsened housing affordability and added pressure to one of the most important engines of household wealth and consumption.
Consumer credit balances may look stable on a long-term chart, but the servicing cost has changed dramatically. Credit card borrowing now carries rates above 20%, which quietly drains disposable income every month.
Wage growth has slowed to 3.5% year over year, the weakest pace since May 2021. Slower income growth combined with higher debt costs and still-elevated living expenses increases the pressure on consumers.
MY HOT TAKES
The Fed does not need to hike for consumers to feel pain. Markets can tighten conditions all by themselves, and right now that is exactly what is happening.
Headline debt levels can look fine while household stress gets worse underneath the surface. The burden is not just how much people owe, but how much more it now costs to carry it.
The housing market is being squeezed by the bond market’s view of inflation and policy, not just by what the Fed says at meetings. Mortgage rates are transmitting that message directly into the real economy.
The labor market story is less comforting than the headline payroll number suggests. Slower wage growth matters because it reduces the consumer’s ability to absorb higher financing costs.
This is already a meaningful tightening cycle, even if it does not come with the usual central-bank theatrics. The bigger risk is that markets may keep tightening longer than policymakers or investors expect.
You can quote me: “At the simplest level, the Fed controls inflation by inflicting pain on you and me.”
Salted wound. Ok, can we just establish something? How do you suppose the Fed controls inflation with the Fed Funds rate? Well, it’s pretty complicated–but really not so much, depending on how you look at it.
At the simplest level, the Fed controls inflation by inflicting pain on you and me. It makes borrowing money more expensive. If borrowing money costs you more, you can afford less, so your consumption and demand decreases, and then basic economic gravity takes over. You know–supply and demand–when demand decreases prices go down. It is simple enough–when simplified the way I just did. 🤣 But really that IS kind of how it works. Ok, now put down your pencils.
I am sure that you heard that inflation is sticky. That is true, inflation is sticky from that last nasty bit of inflation that we had post-pandemic, resulting from initially, a supply chain disruption, and helicopter money, which kind of does the opposite of what we just discussed–it causes demand-pull inflation. There is still a bit of that around, and there are some interesting reasons for that, but let’s not get into those for today’s discussion.
Today, I want to focus on the inflation that the Fed has been talking about for the past year and change. First it was the expectation of tariff-driven inflation, and now its supply shock inflation from the war in Iran. Both have been the rally cry for the Fed hawks who want to get inflation back down to the Fed’s prescribed 2% target. Yes, the Fed did cut a bit last year–three times in fact. But it has for all intents and purposes stopped cutting shifting into wait-and-see mode. Not only is it in wait and see, but it has through forward guidance put the market on notice that not only are cuts not happening soon, but even hikes have been discussed amongst some FOMC members.
Leave that there for a minute and let’s get our bearings. The S&P 500 has drawn down -5.3% since hitting a recent high in late January, including the last 4 days of positive closes. 10-year Treasury Note yields are higher and are well off their ‘26 lows and higher year to date. The same can be said of the 2-year Treasury Note yields–though even more so.
Now here's the thing. The Fed has, thankfully, not raised rates. It has not touched the Fed Funds rate since those three cuts last year. And yet, if you look around, the financial conditions that matter most to you and me–the ones that actually hit your wallet–they have tightened anyway. Without the Fed doing a single thing. That is worth sitting with for a moment. Because it changes the conversation entirely.
Think about what the market itself has already done. The equity drawdown alone–that -5.3% decline off the January highs I just mentioned–has done real economic work. There is a concept in economics called the wealth effect, and it works in both directions. When asset prices rise, people feel wealthier, they spend more freely, and that spending fuels economic activity and, yes, inflation. When asset prices fall, the reverse happens. People feel less wealthy, they pull back, they get cautious. Now, you might say, “Mark, most people don't have huge stock portfolios.” And you're right that the wealth effect is not equally distributed. But in a country where retirement accounts are tied to equity markets and where consumer sentiment tracks the S&P with remarkable consistency, a -5% drawdown has a psychological and behavioral reach well beyond the brokerage accounts of the affluent. The market falling is already doing some of the Fed's work. Nobody had to vote on it.
Then there are yields. The 10-year has been grinding higher all year. The 2-year, which tends to track Fed expectations most closely, has moved even further off its lows. That tells you something important: the bond market has already made its own judgment about where rates are headed, and it is not toward cuts. That repricing flows directly into every corner of the credit economy whether the Fed moves or not.
And nowhere is that more visible right now than in the housing market. The 30-year fixed mortgage rate has climbed back above 6.4%, up roughly half a point from just a month ago. That move has been driven partly by the Iran conflict feeding energy prices back into inflation expectations, and partly by a bond market that simply doesn't believe the Fed is cutting anytime soon. Whatever the cause, the effect is straightforward: affordability has gotten worse, the housing market has cooled further, and one of the largest consumption and wealth-building engines in the US economy is effectively stalled.
So we have equities down, yields up, mortgage rates rising. That is already a meaningful cocktail of tightening, delivered without a single FOMC vote. But here is where I want to bring your attention to something that is easy to miss if you look at it the wrong way. Consumer credit. The Fed reports January’s level later this afternoon. If you pull up the Federal Reserve's G.19 report and look at total outstanding consumer credit on a 10-year chart (check it out below ), it looks… pretty unremarkable. It has been recently been growing, more or less, along a fairly consistent trend. Nothing that would set off alarm bells at first glance. And I think that is exactly why it is dangerous to dismiss it.
Because the level of the debt is not the story. The cost of carrying that debt is the story. That same consumer credit balance that looked manageable at 2020 interest rates is now being serviced at the highest rates in a generation. 👀 Revolving credit–your credit cards–are sitting at effective rates well north of 20%. People are not borrowing less. They are borrowing at roughly the same pace. But they are paying significantly more to do it. That is a monthly drain on disposable income that compounds quietly, month after month, and does not show up in the headline number that everyone glances at and moves past.
Now layer on top of that what last Friday's jobs report actually told us. Not the headline number, which looked fine on the surface (but you know better because you read yesterday’s note: https://blog.siebert.com/why-the-strong-jobs-report-wasnt-so-strong ), but the wage data underneath it. Average hourly earnings came in at 3.5% year over year, which is the slowest pace of wage growth since May 2021. It missed expectations. And it matters enormously in this context, because if your wages are growing at their slowest rate in nearly five years, and your debt is costing you more to carry, and your grocery bill still hasn't fully retreated, and your mortgage rate is back above 6.4% if you're looking to buy or refinance, you are being squeezed from every direction at once.
That is the picture the aggregate data obscures. Four distinct tightening channels–equity wealth, yields, mortgage costs, and wage compression–all operating simultaneously, none of them requiring the Fed to lift a finger. The market, in effect, is doing the Fed's job for it. The question worth asking, and the one I don't think the market has fully priced in yet, is whether it knows when to stop.
YESTERDAY’S MARKETS
Yesterday’s session was another study in cautious optimism, with stocks grinding higher as traders weighed ceasefire reports against Trump's Tuesday deadline ultimatum against Iran. Trump’s confident demeanor in yesterday afternoon’s presser put a little gas in the tank for bulls hoping for a timely end to the conflict. The S&P 500 added +0.44%, the Nasdaq gained 0.54%, and the Dow climbed 0.36%, or 165 points. Oil remained elevated above $110 a barrel, keeping the pressure on energy-sensitive sectors, while large-cap tech provided the day's tailwind. The bond market's 10-year yield held near 4.31%, still reflecting the Fed's frozen posture.
NEXT UP
Durable Goods Orders (February) are expected to have slipped by -1.2% after coming in flat for January.
Consumer Credit (February) is expected to have grown to $19.25 billion from $8.05 billion.
Fed speakers include Williams, Goolsbee, and Jefferson.