Consumer Sentiment Just Hit an All-Time Low. The Fed Is About to Make It Worse.

Added: 2026-05-14

[00:00:00]The number that stopped me this week was 49.8.

[00:00:04]That is the University of Michigan's final consumer sentiment reading for April. 49.8 out of 100. The lowest score in the survey's 74-year history.

[00:00:17]Lower than during the 2008 financial crisis.

[00:00:21]Lower than during the pandemic.

[00:00:23]Lower than any reading ever recorded since this survey began.

[00:00:28]Three of the four worst readings in the survey's entire history have all happened in the last 9 months.

[00:00:35]What that means in plain terms is that the average American feels worse about the economy right now than at any point since Eisenhower was president.

[00:00:45]And here is the thing that should capture your full attention.

[00:00:50]Right as that number landed, futures markets started pricing in something that was considered almost unthinkable at the start of this year.

[00:00:59]The possibility that the Federal Reserve raises interest rates before 2026 is over. As of early May, futures markets are assigning roughly a 30% probability that the Fed's target rate will be higher by the end of 2026 than it is today. That is not the consensus. Most analysts expect the Fed to hold steady or eventually cut, but 30% is not a rounding error. It is a meaningful, real probability that reflects a genuine dilemma. One that the Fed has not successfully navigated without causing significant economic pain. What I want to do in this episode is explain exactly why that dilemma exists, what it means for someone with real savings in a real account, and what history actually tells us about the timeline from a rate hike to when it reaches your portfolio. Start with what the Fed actually does. The Federal Reserve, founded in 1913, though its modern dual mandate structure dates to 1977, has two jobs. Keep inflation close to 2%, keep unemployment low. That is it.

[00:02:08]Two dials. The problem is that those two dials are currently pulling in opposite directions, and the tool the Fed uses to adjust them, the interest rate, only turns one way at a time. On unemployment, the headline number looks fine. The unemployment rate as of April 2026 sits at 4.3%.

[00:02:30]That is historically low. By the Fed's own framework, the labor market is technically healthy. The dial is in the green zone, and Jerome Powell has said as much. The job market, as the Fed measures it, is not flashing a recession signal. But here is where it gets more complicated. The unemployment rate counts whether you have a job. It does not count whether that job pays enough to cover your rent, your groceries, or your gas. A recent Gallup survey found that only 27% of college graduates believe now is a good time to find a quality job, down from roughly 75% in 2021. That is a reading not seen since 2011, in the immediate aftermath of the Great Financial Crisis, when the actual unemployment rate was far higher than it is today. The jobs exist, but the quality of those jobs, and what they actually pay relative to what things actually cost, is a different story. And the Fed's model does not capture that distinction. The dial says green.

[00:03:35]Millions of household budgets say something else entirely. That brings us to the second dial, inflation. The Federal Reserve's preferred measure is called core PCE, personal consumption expenditures, excluding food and energy.

[00:03:50]The Fed's target is 2%. Core PCE has now been above that 2% target for 60 consecutive months. 60 months, five full years. And while it was trending lower through much of 2024 and early 2025, there are now clear signs it is turning back up, driven largely by energy prices. Here is the mechanism worth understanding clearly. Oil prices have surged significantly over the past several months, partly driven by Middle East conflict and disruptions near the Strait of Hormuz. Gas prices crossed $6 a gallon in Los Angeles in early May.

[00:04:27]Nationally, the average is approaching $5. That energy shock has already shown up in headline CPI, which rose at a 3.3% annual pace in March, the hottest reading in nearly 2 years. But here is the key detail most people miss. There is a lag. Energy prices move first. They show up in the consumer price index before they fully show up in core PCE, which the Fed watches most closely, which means the core PCE data the Fed is looking at right now does not yet fully reflect what oil prices have already done. The hotter data is still coming, and the Fed knows it. So here is the corner the Fed is in. If they look at inflation, the data is deteriorating, and the trend is pointing up. In every modern instance where inflation has turned back up for a sustained period, the Fed has responded by raising rates.

[00:05:23]That happened under Arthur Burns in the 1970s, under Greenspan, under Bernanke, under Powell himself. The institution's reflexes run in one direction when inflation rises. Now look at the other dial. If they look at the labor market through the household budget lens, rather than the headline number, the economy is showing real stress. Consumer sentiment at an all-time low. Revolving credit balances, credit cards, at a record high above $1.3 trillion.

[00:05:56]Moody's recession probability model sitting at 49% before the Iran conflict even escalated. 1% point below the threshold that has preceded every US recession since the 1940s. If the Fed raises rates into that environment, it risks tipping a fragile economy into something worse. But let me be more specific about what a rate hike actually does to your life. The Federal Reserve controls short-term interest rates. When those go up, borrowing gets more expensive across the entire economy.

[00:06:30]Mortgages reprice. The 30-year fixed mortgage rate, already sitting near 6.35%, would likely push towards 7% or higher.

[00:06:40]For someone buying a median-priced American home, roughly $320,000, the difference between a 6% and a 7% mortgage rate is about $200 a month.

[00:06:52]That is $2,400 a year. For the family already running on credit cards to cover groceries, that math closes a door. Car loans get more expensive. Business credit gets more expensive. Companies stop expanding.

[00:07:08]Hiring slows. And the unemployment rate, the Fed's second dial, starts to rise.

[00:07:14]There is a technical name for what happens when you get rising inflation and slowing growth at the same time: stagflation. It is the word central bankers fear most because their primary tool, the interest rate, cannot fix both problems simultaneously. You can raise rates to fight inflation, but that slows the economy. You can cut rates to stimulate the economy, but that risks letting inflation run hotter. The 1970s gave us the clearest case study in this.

[00:07:45]The Federal Reserve, under political pressure to keep rates low, let inflation become embedded. Eventually, they had to raise rates to 18% to bring it back under control. And the recession that followed was severe. Now, none of that is our baseline scenario today. The Moody's number of 49% is alarming, but it is not 100%.

[00:08:08]Fidelity's research notes that the bar for a hike is, in their words, very high. JPMorgan's base case as of late April is that the Fed holds rates steady through the rest of 2026, with the first potential hike not arriving until sometime in 2027. And Goldman Sachs recently cut its own recession probability estimate to 25%, citing still resilient payrolls. The picture is genuinely uncertain, which is exactly what makes it worth understanding clearly. Here is the part that history teaches us that most news coverage misses entirely. Even if the Fed does hike rates, even if they hike in September of 2026, for example, the full economic impact of that decision does not land immediately. There is a documented lag between when the Fed raises rates and when it actually affects the stock market and the broader economy. The academic literature puts that lag at roughly 9 to 18 months. Go back to June of 1999.

[00:09:11]The Fed began raising rates. The stock market did not peak until 9 months later, and it was 18 months after the initial hike before the economy actually entered recession. In that 9-month window between the first hike and the market peak, the Nasdaq 100 doubled in price. Euphoria around internet technology was so intense that rate hikes barely registered. Eventually, the math caught up, and when it did, the correction was severe. But, the point is, the timeline matters enormously for anyone who is trying to position themselves correctly. If a similar pattern plays out today, and there is no guarantee it will, but history rhymes, a rate hike in late 2026 might not visibly affect the stock market until mid-2027.

[00:10:01]The economic pain on the ground might not arrive until late 2027 or into 2028.

[00:10:08]In that window, AI infrastructure spending is real, energy demand is real, and the capital pouring into data centers, nuclear power, and base metals is real. The euphoria may not be identical to 1999, but the dynamic is recognizable. What does this mean for a practical investor?

[00:10:28]Three things. First, understand where the risk actually lives. If you own long-duration bonds, bonds that mature in 10 or 20 years, rising rates are your clearest near-term enemy. Bond prices move inversely to rates. A rate hike hurts bondholders directly and immediately. Second, the S&P 500's average drawdown during recessions is roughly 30%. That is painful, but it is also a historical average that includes some of the greatest long-term buying opportunities in market history. The investors who bought the S&P 500 in the trough of every modern recession, 2009, 2003, 2020, captured some of the most asymmetric returns available to ordinary people. Third, if there is a lag, if the market runs for another year before rates fully bite, then the question is not just is a recession coming, but where am I in the timeline and what am I positioned for? None of this is about predicting the future. Moody's at 49% Goldman at 25% JPMorgan at a 2027 hike. Smart people with serious models disagree. What you can do is understand the mechanism clearly enough that you are not surprised by any outcome. Not the hike, not the lag, not the eventual correction, and not the recovery that follows it. If this kind of breakdown, the mechanism behind the headlines, not just the headlines themselves, is what you find useful, then I want to invite you to join the What Changes Membership Community. The people in that community are choosing to stay informed together.

[00:12:11]They are retail investors who want to understand what is actually happening in the financial system, not just react to it. If that sounds like you, the link is below. We would genuinely love to have you. One last thing before you go. The scenario I have described today, stagflation risk, a central bank in a corner, a potential window of market euphoria before the pain arrives, connects directly to something we have covered before and will cover again.

[00:12:41]Because if the Fed does raise rates, and if a recession does follow, the impact on housing, on commercial real estate, on regional banks that are already sitting on underwater bond portfolios, that story is not finished. In fact, it may be just beginning. That is what we are going to dig into next.