📊 Charge-Off and Delinquency Rates on Loans

To: Institutional Clients

From: Global Economics Strategy Team

Date: January 2026

Subject: Credit Quality Analysis: Normalization of Consumer Stress and C&I Resilience

1. Executive Summary

The latest credit data suggests a decisive pivot from the peak stress observed in mid-2024 toward a period of credit normalization. While credit card delinquencies and charge-offs peaked in the first half of 2024, the subsequent downward trajectory indicates that the "lagged effect" of previous monetary tightening has likely peaked without triggering a systemic credit event.

The overall tone is one of cautious stabilization. The lack of extreme Z-scores suggests that we are not entering a crisis regime, but rather a phase where credit quality is returning to historical medians. For policy, this reduces the urgency for emergency rate cuts to stave off a financial crisis, shifting the Fed's focus back to a balanced mandate of growth and inflation.

2. Five Main Views

• Consumer Credit Peak is Behind Us: Credit card delinquency rates have declined from a peak of 3.22% (April 2024) to 2.92% (January 2026), a reduction of 30bps, signaling improved household liquidity or successful debt restructuring.
• Charge-Offs are Receding Rapidly: The Credit Card Charge-Off Rate has fallen from 4.64% (July 2024) to 3.84% (January 2026), a significant 80bps drop that suggests a cooling of the "burn rate" for unsecured consumer debt.
• C&I Loans Remain a Quiet Concern: Unlike consumer credit, C&I loan delinquencies have trended steadily upward, rising from 0.97% in Jan 2023 to 1.34% in Jan 2026 (+37bps). While not yet critical, the trend is divergent from the consumer sector.
• Absence of Tail Risk: With Z-scores for all three series sitting between -0.41$\sigma$ and -0.55$\sigma$, current credit stress is well within one standard deviation of the 10-year mean, ruling out a systemic "credit crunch" scenario.
• Regime Stability: All metrics currently sit near the 40th-50th percentiles of their 10-year ranges, indicating a return to "long-run average" credit conditions.

3. Macro Characterization

(i) Growth: The data suggests a "soft landing" trajectory. The decline in consumer charge-offs implies that household balance sheets are absorbing higher costs of capital without a collapse in solvency, supporting continued private consumption.

(ii) Labor Market: The steady decline in credit card delinquencies since mid-2024 is a strong proxy for labor market resilience. It suggests that employment levels have remained sufficiently robust to allow consumers to service debts and avoid default.

(iii) Inflation: While credit data is a lagging indicator, the stabilization of charge-offs suggests that the "inflation tax" on low-income households has peaked, reducing the risk of a sudden, inflation-driven spike in defaults.

4. Cyclical Alignment

Based on the provided 10-year Z-scores (all < |1.0|) and percentiles (38th to 47th), the current regime is classified as a 'mid-cycle' pause. We have moved past the late-cycle overheating seen in the 2024 peak (where charge-offs approached 4.64%) and have not entered a recessionary regime (which would be characterized by Z-scores > |2.0|). The data reflects a structural stabilization where credit quality is aligning with historical norms.

5. Policy Outlook

Forecast: Hold / Gradual Easing

The balance of risks has shifted. The disappearance of an imminent credit crisis (evidenced by the falling charge-off rate) removes the pressure for the Fed to aggressively cut rates to prevent financial instability. However, the slow creep in C&I delinquencies suggests that corporate borrowers are still feeling the weight of restrictive rates.

We expect the Fed to maintain a neutral bias, with a high probability of a 25bps cut in the next quarter—not to fight a crisis, but to normalize rates as the economy settles into this mid-cycle pause. The risk of "over-tightening" has diminished, but the data supports a measured, data-dependent approach.