JPMorgan’s Marko Kolanovic doesn’t agree with the notion that the majority of the drag from the most aggressive rate-hiking campaign in a generation is behind us. At all. He doesn’t agree with that thesis at all.

Some analysts suggested earlier this year (and some are still suggesting as much today) that because the financial conditions channel operates more efficiently in modernity than it did decades ago, we’ve likely seen peak drag, even if the cumulative total impact may still be growing.

Even if that’s the case, I’m not sure it’s very comforting given where inflation still is. If the Fed begins to suspect that rates-sensitive sectors of the economy haven’t responded as expected and aren’t likely to respond on a lag, they might ratchet rates even higher, increasing what some say are already high odds of a hard landing.

For his part, Kolanovic suspects it’s just a matter of time before reality comes knocking. “[The] lags are longer this time, which has resulted in complacency and broad acceptance of the soft landing, or even no-landing, thesis,” he wrote. Here’s why the lags are longer, according to Marko:

Lags are longer this time for several reasons that are fairly evident: If consumer cash balances going into tightening were higher than before, this will make the lag longer. If corporates locked in longer-dated financing at low interest rates, that will also make lags longer (i.e. until there is a need to refinance and the wall of maturities is hit). If mortgages were refinanced broadly at low interest rates, it will make the lag longer. If there was pent-up demand for services post-COVID reopening, and especially strong reopening demand from China — that would provide an additional boost to the global economy and delay the negative impact of interest rates. Similar is true for fiscal expansion, such as student debt relief, infrastructure spend, etc. Finally, a warm winter, SPR release and large energy subsidies cushioned (i.e., delayed) the additional inflationary impact of the energy crisis on consumers and corporates.

There’s not much to argue with there. As Marko suggested, it’s “fairly evident” why the US economy has yet to roll over in earnest.

But it will. Roll over in earnest. Or at least according to Kolanovic, who pointed to rising delinquencies and bankruptcies to help make the case.

There’s a “clear trend,” he said, of the chart. “The last time there was such an increase was in 2007.”

Obviously, mortgage delinquencies are low given that many buyers locked at record low rates. “That market is effectively frozen,” Marko remarked.

The bottom line, he warned, is that it’s naive to think everything is going to generally be ok given the sheer scope and rapidity of the tightening impulse.  “The core risk for markets and the economy is the interest rate shock of the past 18 months,” he said.

The table on the left, above, shows changes in the relevant rates versus both their post-2008 averages and their COVID-era lows.

“The current change in interest rates is about five times larger than the 2002-2008 increase,” he wrote.