Danielle DiMartino Booth believes the Federal Reserve is caught between two perilous outcomes. In her view, cutting interest rates too much would slash retirees’ income, forcing baby boomers – who own a large share of stocks – to sell, triggering a market drop.

But keeping rates high risks deepening economic weakness already visible in falling home prices, rising bankruptcies, and tight corporate credit spreads.

Booth points to data revisions showing long-term job losses began in early 2024, suggesting a recession may already be underway. Business investment is slowing, major bankruptcies are growing, and credit risk is being underpriced. Consumer strength post-pandemic was, she argues, fueled by stimulus and forbearance, leaving households stretched and dependent on credit.

Danielle warns that demographics limit the Fed’s ability to repeat past rate-cut cycles. She sees passive investment flows propping up markets regardless of fundamentals, but says those flows could reverse if savers’ income falls.

The Fed faces what she calls a “Sophie’s choice” between affordable housing and stable markets – a choice with no easy outcome.