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Experts in the financial sector have been keeping a close eye on the economy, with some sounding the alarm of a possible recession. Ben Miller, CEO of the fintech investment firm Fundrise, observed, “One hundred percent of recessions have been preceded by a rate hike.”
In a conversation with financial journalist Cardiff Garcia, Miller made the case that the Federal Reserve’s interest rate increases presage an upcoming recession, even if the effects aren’t felt right away, warning of the “Great Lag,” and stressing a cautionary approach.
“My conclusion has three parts,” said Miller. “One: It’s the Fed that causes recessions. Two: There’s a very long lag between interest rate hikes and the recession. And three: The losses from a recession are so significant that by far the most important thing over the next 24 months is to be prepared for that recession.”
The Fed and Interest Rate Hikes
Miller contends that the Fed plays a pivotal role in triggering recessions through its interest rate policies.
On Fundrise’s “Onward” podcast, Miller and Garcia discussed the cascading effect that high interest rates could have on various aspects of the economy.
When the Fed hikes interest rates, it essentially increases the cost of borrowing money. This has immediate implications for both consumers and businesses, affecting their spending and investment behaviors.
For consumers, high interest rates mean that loans for homes, cars, and education become more expensive. Credit card debt also becomes costlier to maintain. As a result, consumer spending, a significant driver of economic activity, starts to decline. Reduced spending impacts businesses, leading to lower sales and profits. This, in turn, can lead to layoffs, further reducing consumer spending in a vicious cycle.
For businesses, high interest rates make it more expensive to finance expansion or even day-to-day operations. Companies may cut back on hiring, halt plans for new projects, or even lay off employees to balance the books. This contraction in business activity contributes to economic slowdown and in extreme cases, can lead to a recession.
Miller touched on the impact of high interest rates on the debt burden. “The amount of public and private debt in America today is $95 trillion. That’s twice, double, 2007,” he said.
With higher interest rates, the cost of servicing this debt rises exponentially for the government and private entities, potentially leading to a tightening of fiscal policies and reduced public spending, further exacerbating economic slowdown.
The Great Lag
Given that the Fed has been raising interest rates for some time now, the question, then, is: Why are we not yet seeing signs of recession?
For Miller, the point to emphasize is that there’s a distinct lag between raised interest rates and the onset of a recession, which is supported by historical data. He also noted that the beginning of the lag should be measured from the point of peak interest rates, and we have yet to hit that point.
Analyzing nine previous recessions, Miller repeatedly highlighted the evidence of lag, with each downturn following a period of extensive interest rate hikes. Across the recessions analyzed, Miller found a 43% reduction in the S&P 500 from peak to trough and an average lag of 21 months from peak interest rates to the bottom of a recession.
“July 2006 was the peak of interest rates, and it was 18 months from that point to December 2007, and then 2008 was a very bad recession,” he explained. “1980 was only nine months. So it varies, and this one could be shorter than average, but the point that I found really shocking was, ‘Oh, my god. If we’re a nine-month lag from December 2023, which is when the Fed says their forecast on peak interest rates is, then we’re not even in the first inning yet. The game hasn’t even started.”
In terms of the cause of the lag, Miller pointed out that lenders and borrowers do their best to fight the recession by adjusting or capping their rates, delaying the onset.
“Essentially, everybody in the market is fighting a recession. Nobody wants to lose their job or lose their building, lose their house. It’s a battle,” he told Garcia. “And the Fed’s on one side, they’re raising rates and everyone else is fighting them. And that’s what creates a lag. And the thing that people don’t realize is how long the lag is.”
One potential sign of the lag that Miller can point to is in commercial real estate, an asset that he’s steered Fundrise away from as part of his recession prediction.
He explained that, in taking drastic steps to prevent foreclosures as the market declines, borrowers and lenders “kicked the can, and that cost a certain amount of money to kick the can.
“If interest rates are higher for longer and they don’t come down, you can’t kick the can. There’s no hill. It’s just you climb to the top of a plateau, and that’s where you stay, and then they’re in default. Once the market realizes that, that’s when the market collapses and that’s when we’re done.”
Fundrise’s Strategy
Given what he sees as the looming threat of a recession, Miller outlined Fundrise’s conservative approach to safeguarding its investors’ money.
“Most important thing when you’re managing people’s money is to not lose money,” he said, emphasizing that his focus is on making safe bets based on long-term growth rather than pursuing risky short-term gains.
“I’m talking about what I think is going to happen, a recession, which is huge amounts of money, 20%, 30%, 40%. And that’s my number one concern, is to position the portfolio defensively,” he explained.
Fundrise’s recent strategy involves expanding into areas outside of real estate, including private credit — where Miller sees an opportunity for growth despite the threat of recession — and venture capital.
“Along the edges, of course, we’re really active in private credit. You can be a lender today at very high rates. You can make almost double-digit yields at risk that is, I think, very well worth it.
“The recessions are the ballgame, they’re make or break; the 43% down is so much more consequential than the 10% up this year.”
