Fed’s Next Rate Cut = Cause for Alarm?

Hello, and welcome back to Moneyball Economics!

It’s been a frosty few days thanks to the massive winter storm that just swept through the United States. In places like Pennsylvania, they’ve clocked more than 20 inches of snow on the ground — so I hope you’ve been keeping warm.

All that snow really slowed down business across the country. But today, I’m here to tell you about a whole a different kind of slowdown…

One that’s starting to hit consumers where it hurts most, and could soon force the Fed’s hand with another rate cut.

Watch the video below for the full story:

Video transcript:

Welcome to Moneyball Economics, I’m Andrew Zatlin.

And Houston, we have a problem.

5% of all auto loans in the United States are now 90 days or more delinquent. Let me say that again, let it sink in.

5% of all auto loans haven’t been paid for at least three months, and this is as of November. The Federal Reserve thinks it’s going to hit 6%. And for a little context, historically it’s 3.5%. When we hit 6%, we are firmly in the zone where we have seen big financial crises, where there is a lot of distress out there.

So is that where we are?

Is this economy basically a castle built on sand that’s about to crumble?

Are we witnessing a really bad situation right before our eyes?

Well, yes and no.

First of all, I’d like to point out that a lot of this distress that we’re seeing in the auto loan sector is probably related to what’s been going on with the deportation of two to 3 million individuals.

A lot of these undocumented immigrants who have been kicked out or who have left, well, they left behind auto loans, a lot of ’em had cars. And to kind of give you an indication of why I think this is correct, let’s look at what’s going on in the subprime auto loan sector. Delinquent 15% of all those loans, and that’s compared to historically 10%.

So I do believe that some of this problem is exacerbated by what’s been going on with undocumented immigrants, but it’s still sitting on the top of a big foundation of consumers who are in distress. And I say that because it’s not isolated to auto loans…

Credit cards. So credit card loans are also delinquent and they’re way above 3%. Historically they’ve been at 2.6%. Same thing with bank loans way above where they were pre COVID. We have nothing but signs that consumers who took out loans are having problems paying them back.

And really this is kind of the dark side of what happens when you raise interest rates.

A lot of folks might think, “oh, we raised interest rates. Now when I look at my income and what’s left over my discretionary spending, I can’t buy that, so I won’t buy it.” Well, that’s not the way a lot of folks out there are. Or even if they were prudent, maybe they bought some furniture or something, maybe they borrowed some money and all of a sudden they’ve lost their job.

Quite frankly, there’s a lot of that going on. There’s been very little job growth over the past year or two and all this debt piling up. And two years ago, that’s when the Fed was raising their rates pretty aggressively. So what we have is a situation where consumers are overstretched and they are in a financially stressful place.

And you know what happens when people can’t pay off their loans? Well, they don’t walk away. They declare bankruptcy.

So I looked at bankruptcy levels, I looked at pre COVID and post COVID levels of delinquencies, and there’s some good news. Now, the good news is we are certainly not back to the level of pre COVID. If we look at the number of filings, chapter seven, which represents individuals and chapter 13, which represents companies well, it’s a lot higher than it was in ‘22 and ‘23.

And last year, 2025 was 10% or more higher than 2024. But overall, we’re still below the pre COVID levels. We’re at about 70% of the number filings in 2019. So that’s good-ish news, but it’s climbing. Let’s face it. What we have is an economy where throwing up interest rates caused problems for a lot of people, and it came at unfortunately, the wrong time when we had massive job losses.

So the reason I raised this is because the Federal Reserve has to consider their next step, and I think when it all comes down to it, ignore all these other issues like is inflation too high or not?

It all comes down to we are a consumer economy and there’s now a big chunk of consumers who are not spending money, whether they’re not spending money because they can’t afford to or because they went through bankruptcy, doesn’t matter.

One of the most critical metrics out there that the Fed is looking at is something called debt servicing as a percentage of household income. Basically, how much do I have to spend every month to pay off my credit card loans, my mortgage, whatever it is that I’m carrying is debt as a percentage of what I’m bringing in because there’s a limitation. Now, some consumers can go beyond that.

They borrow against their 401k, they get more credit cards, but it doesn’t matter. We are now at the level where we were pre COVID. There’s not a lot of buffer room. So if the Fed wants this economy to continue going forward, the average American household is already not quite the breaking point, but they’re already at the limit of how much debt they’re going to take on and therefore how much they’re going to spend. And we’ve got a big chunk out there of consumers who’ve already are done for.

So I think the Federal Reserve is going to cut at least one more time.

Could be this week, could be next month, doesn’t matter.

Another rate cut’s coming to provide some of that much needed relief. A lot of consumers who are in financial distress can take their loans. We’ve had two rate cuts last year, will have another one potentially in the next couple of months that brings down a lot of the pressure they can refinance and so forth.

I’m also looking at the stock and bond market because again, you lower rates, you’re heating up the economy, you’re heating up the stock market and the bond market and gold. So a lot of things coming down the pipeline in 2026, and we are going to position for it.

We’re in it to win it, folks.

Zatlin out.