People often think recessions are random events that happen without warning. In fact, the true cause of recessions is hiding in plain sight.

1. What Causes a Recession?

2. What causes a Recession?
Recessions are a natural part of the US economy. However, they don’t
happen by accident.
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The Federal Reserve’s job is to maintain full
employment and stable prices. They achieve
these goals by adjusting interest rates.
• Bad economy (unemployment rises and prices fall) =
Fed lowers interest rates
• Good economy (unemployment falls and prices rise) =
Fed raises interest rates

3. The Fed Raising Interest Rates
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The Fed raises interest rates to contain inflation. The Fed has raised rates prior to every
recession. There's never been a recession without the Fed first raising rates.

4. Higher Interest Rates Cause Recessions
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As the Fed raises interest rates, they increase cost of borrowing.
The interest rates on credit cards, auto loans, business lines of credit, and
home equity lines all increase as the Fed raises rates.
As rates rise, economic activity slows. People avoid using credit cards,
they continue to drive their old car instead of financing a new one, and
businesses hold off on expanding because borrowing costs are too high.
As businesses and consumers delay spending, eventually, the economy
falls into a recession.

5. The Fed Lowers Interest Rates During a Recession
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During a recession, the Fed lowers interest rates to stimulate the economy
and start the next cycle.

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