- The resumption of student loan payments combined with interest-rate hikes will fuel a consumer-led recession, David Rosenberg says.
- The economist says it generally takes six months after rate hikes of 500 basis points for a downturn to hit the economy.
The Federal Reserve's aggressive hikes to interest rates coupled with student-loan payments resuming in October will pave the way for a consumer-led recession, says David Rosenberg, a top economist.
After a three-year pause, the federal government is set to start charging interest on federal student-loan balances once more, and student-loan borrowers are expected to start making payments again in October. The resumption comes after the Supreme Court blocked President Joe Biden's plans to forgive up to $20,000 in student debt for federal borrowers.
In a CNBC interview, Rosenburg said the loan repayments, combined with higher interest rates, threatened to trigger a consumer slowdown. The Fed has already lifted interest rates from almost zero to over 5% since last spring in an effort to bring inflation down to its 2% target, and traders are bracing for more hikes later this year.
"I think it's going to start at the consumer level, and I think that we'll see the first signs of this after the student loan forgiveness program ends in the coming months. So, I think that it's going to be consumer-led," Rosenberg said, speaking about a prospective recession.
Meanwhile, Rosenberg said the full impact of the Fed's rate hikes over the past year was yet to kick in, stressing that it had historically taken six months for a recession to hit the economy after interest rates rose by 500 basis points.
"So, I think that by the third or fourth quarter, we're going to start to see more evidence but it's going to come out of the consumer side, not the corporate side," Rosenberg said, adding that the downturn would be "more severe than people think into 2024."
The veteran economist has long been bearish about the US economy and stock market, despite promising data indicating healthy job numbers, growing GDP, and a sizzling tech-fueled rally. It's a view he's faced backlash over, with Rosenberg revealing he's been mocked and threatened because of his gloomy forecasts.