US Market signals recession, Repo Rates rise & Markets Falls

The Recession over US Markets

What we see right now in the US Markets, can be considered the onset of “A Great Recession”. And, the Federal Reserve’s adjustments to the repo rate & volumes in the bond market are central to these concerns.

Understanding the Repo Rate and Its Impact

The repo rate, or repurchase agreement rate, is the interest rate at which banks borrow short-term funds from the Federal Reserve. Therefore, an increase in this rate makes borrowing more expensive, leading banks to pass on these costs to consumers and businesses. As a result, a reduce in spending and investment, potentially slowing economic growth. In December 2024, the Fed cut key interest rates by 0.25%, lowering the reverse repo rate to 4.25%. Despite this cut, borrowing costs remain elevated compared to previous years, contributing to financial strain.

The ultimate warning – Yield Curve

The bond market serves as a critical indicator of economic health. Commonly, long-term bonds yield higher returns than short-term ones. However, recent trends have shown a reversal of the yield curve, with long-term yields approaching 5% while short-term yields remain steady . This shift suggests that investors are demanding higher returns for longer-term investments, reflecting concerns about future economic stability.

The Bond Yield Curve — The Bond Yield curve tells the difference between Long-term & Short-term Bond Interest Rates, whenever, the plot crosses the lines, it causes a great recession

Consumer Debt and Spending Patterns

American consumers are showing concerning financial behaviours. Credit card debt rose to a record $1.21 trillion by the end of 2024, a $45 billion increase from the previous quarter. This rise is partly attributed to consumers making purchases expecting higher prices due to rising tariffs . While this spending may provide a temporary boost to the economy, the accompanying rise in debt on credit card debt increased from 6.36% to 7.18%, showing long-term risks .

Corporate Sector: Layoffs and Financial Strain

The corporate landscape is also experiencing turbulence. Several tech companies have announced significant layoffs:

Sprinklr: Approximately 500 employees laid off (15% of workforce) due to poor business performance.
Sonos: Around 200 employees let go following previous layoffs.
Workday: 1,750 employees laid off, affecting 8.5% of total headcount.
Okta: 180 employees laid off, following a previous reduction of 400 workers.
Cruise: 50% workforce reduction as it prepares to shut down operations.
Salesforce: Over 1,000 jobs eliminated amid active recruitment for AI product sales .

These layoffs reflect broader efforts by companies to streamline operations amid economic uncertainties.

Impacts on Indian Economy

A recession in America means people there are spending less, companies are cutting jobs, and overall growth is slowing. But why does that matter to India? It’s simple: America is like the heart of the global economy. When the heart slows down, other parts feel the pain too. And, India is no exception.

Therefore, recession in the US leads to: