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    Here’s what it would take for the Fed to start slashing interest rates in 2024

    If the Fed meets market expectations and starts cutting aggressively in 2024 it likely will be against a backdrop of a sharply slowing economy and rising unemployment.
    Market pricing has grown even more aggressive on Fed policy easing, with fed funds futures now pointing to five quarter-percentage-point rate cuts next year.
    “The market keeps trying to front-run these rate cuts, only to be disappointed,” said Kathy Jones, chief fixed income strategist at Charles Schwab.

    The Marriner S. Eccles Federal Reserve building during a renovation in Washington, DC, US, on Tuesday, Oct. 24, 2023.
    Valerie Plesch | Bloomberg | Getty Images

    Interest rate cuts don’t happen during good times, something important for markets to remember amid hotly anticipated easing next year from the Federal Reserve.
    If the Fed meets market expectations and starts cutting aggressively in 2024, it likely will be against a backdrop of a sharply slowing economy and rising unemployment, which in turn would bring lower inflation.

    Central bank policymakers, however, won’t cut for the sake of cutting. There will have to be a compelling reason to start easing, and even then rate decreases are likely to come slowly — unless something breaks, and the Fed is forced into more aggressive action.
    “The market keeps trying to front-run these rate cuts, only to be disappointed,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “In a different cycle, when inflation hadn’t spiked so much, I think the Fed would have been cutting rates already. This is a very different cycle. There is going to be much more caution on their part.”
    The latest market rumble over the prospect of rate cuts came Tuesday morning, when Fed Governor Christopher Waller said he could envision easing policy if inflation data cooperates over the next three to five months.
    Never mind that fellow Governor Michelle Bowman, just minutes later, said she still expects rate hikes will be necessary. The market instead chose to hear Waller more clearly, perhaps because he has been one of the more hawkish Fed officials when it comes to monetary policy, while Bowman was merely reiterating an oft-stated position.

    Five rate cuts anticipated

    “If the economy moderates at all, you could be talking about a real disinflation story, and I think that’s what Waller would be getting at,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “If the real fed funds rate continues to go higher, as I expect it will, then you’d want to offset that through rate cuts. And the amount of rate cuts I think they’re going to have to do is a relatively large amount.”

    LaVorgna, the chief economist at the National Economic Council under former President Donald Trump, said he thinks the Fed could have to cut by as much as 200 basis points next year, or 2 percentage points.
    Market pricing has grown more aggressive on Fed policy easing, with fed funds futures now pointing to five quarter-percentage-point rate cuts next year, one more than before the latest speeches, according to the CME Group. Stocks have rallied since as investors prepare for lower rates.

    It could be a risky bet if inflation doesn’t cooperate.
    “The Fed doesn’t want to take its foot off the brake too early. I don’t see them cutting just to reach some theoretical neutral rate,” said Chris Marangi, co-chief investment officer for value at Gabelli Funds. “We expect some economic softness next year, so that won’t be a surprise. But a significant cut in rates needs to be preceded by significant economic weakness, and that’s not discounted in stock prices today.”
    Fed officials at their meeting in two weeks will update their economic projections over the next several years, a process that includes revisions to the so-called “dot plot” of individual members’ expectations for interest rates.
    During the last update, in September, Federal Open Market Committee members penciled in the equivalent of two quarter-point cuts next year. However, that was predicated on another rate increase in 2023 that almost certainly is not happening, judging both by recent Fed commentary and market expectations.
    If the Fed were to go on a cutting spree next year, then, it would almost have to be accompanied by pronounced economic weakness. Virtually all previous Fed cutting cycles have happened during or around recessions.

    Fears of a hard landing

    Hedge fund titan Bill Ackman said Tuesday that unless the Fed starts cutting, it will in fact be the cause of a sharp downturn that it then would have to address.
    “We’re betting that the Federal Reserve is going to have to cut rates more quickly than people expect,” Ackman said in an upcoming episode of “The David Rubenstein Show: Peer-to-Peer Conversations,” which is aired by Bloomberg. “That’s the current macro bet that we have on.”
    “I think there’s a real risk of a hard landing if the Fed doesn’t start cutting rates pretty soon,” the head of Pershing Square Capital Management added.
    However, even some of the historically more dovish Fed officials aren’t showing their hands on when they think cuts will come.
    Atlanta Federal Reserve President Raphael Bostic, an FOMC voter next year, wrote Wednesday that he sees pronounced downward trends in economic activity and inflation. Richmond President Thomas Barkin said he also sees slowing but added that he remains “skeptical” that inflation will come down to the Fed’s 2% target quickly and said policymakers need to keep potential rate hikes on the table.

    “The Fed is trying to slow the economy down, and if they don’t succeed with slowing consumption down … that would then imply that maybe the market should be pricing that rates are going to be higher for longer than what futures are pricing at the moment,” Tosten Slok, chief economist at Apollo Global Management, told CNBC on Tuesday. “Maybe we need to get all the way into Q3 before the Fed will begin cutting.”
    Indeed, Gary Cohn, former director of the NEC under Trump and former chief operating officer at Goldman Sachs, said the kind of economic weakness that would precipitate rate cuts is unlikely, at least in the first part of 2024. Consequently, the Fed could lag its global counterparts when it comes to relaxing the fight against inflation and not start cutting until “maybe” the third quarter, he said.
    “You don’t want to be early to leave when you’re the last one to come to the party,” Cohn told CNBC’s Dan Murphy on Wednesday at the Abu Dhabi Finance Week conference. “You have to be the last one to leave the party, so the Fed is going to be the last one to leave this party.” More

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    U.S. GDP grew at a 5.2% rate in the third quarter, even stronger than first indicated

    The U.S. economy grew at an even stronger pace then previously indicated in the third quarter, the product of better-than-expected business investment and stronger government spending, the Commerce Department reported Wednesday.
    Gross domestic product, a measure of all goods and services produced during the three-month period, accelerated at a 5.2% annualized pace, the department’s second estimate showed. The acceleration topped the initial 4.9% reading and was better than the 5% forecast from economists polled by Dow Jones.

    Primarily, the upward revision came from increases in nonresidential fixed investment, which includes structures, equipment and intellectual property. The category showed a rise of 1.3%, which still marked a sharp downward shift from previous quarters.
    Government spending also helped boost the Q3 estimate, rising 5.5% for the July-through-September period.
    However, consumer spending saw a downward revision, now rising just 3.6%, compared with 4% in the initial estimate.
    There was some mixed news on the inflation front. The personal consumption expenditures price index, a gauge the Federal Reserve follows closely, increased 2.8% for the period, a 0.1 percentage point downward revision. However, the chain-weighted price index increased 3.6%, a 0.1 percentage point upward move.
    Corporate profits accelerated 4.3% during the period, up sharply from the 0.8% gain in the second quarter.

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    Former Trump advisor says the U.S. economy is ‘back to normal,’ but markets may be jumping the gun on rate cuts

    Cohn — who was chief economic advisor to former U.S. President Donald Trump from 2017 to 2018 — does not see the Fed cutting interest rates until the second half of 2024.
    Drawing on 100-year average data, Cohn said the U.S. economy is “back to a normal, but we all forgot what normal is.”

    President Donald Trump praises departing economic adviser Gary Cohn (L) during a Cabinet meeting at the White House, Washington, March 8, 2018.
    Kevin Lamarque | Reuters

    The U.S. economy is “back to normal” for the first time in two decades, but the market is getting ahead of the likely pace of interest rate cuts, according to IBM Vice Chairman Gary Cohn.
    The market is narrowly pricing a first rate reduction from the Federal Reserve in May 2024, according to CME Group’s FedWatch tool, with around 100 basis points of cuts expected across the year.

    The central bank in September paused its historically aggressive monetary tightening cycle with the Fed funds rate target range at 5.25-5.5%, up from just 0.25-0.5% in March 2022.
    Cohn — who was chief economic advisor to former U.S. President Donald Trump from 2017 to 2018 and is a former director of the National Economic Council — does not see the Fed starting to unwind its position until at least the second half of next year, after similar moves from other major central banks that began hiking sooner.
    “You don’t want to be early to leave when you’re the last one to come to the party. You have to be the last one to leave the party, so the Fed is going to be the last one to leave this party,” Cohn told CNBC’s Dan Murphy on stage at the Abu Dhabi Finance Week conference on Wednesday.
    “The economy will clearly turn down before the Fed had starts to cut interest rates, so I strongly believe that for the first half of ’24, we will see no rate activity in the Fed. Maybe [in the third quarter], we’ll start hearing rumblings of some forward guidance of lower rates.”

    The U.S. consumer price index increased 3.2% in October from a year ago, unchanged from the previous month but down considerably from a pandemic-era peak of 9.1% in June 2022.

    Despite the sharp rise in interest rates, the U.S. economy has so far remained resilient and avoided a widely predicted recession, fueling bets that the Fed can engineer a fabled “soft landing” by bringing inflation down to its 2% target over the medium term without triggering an economic downturn.
    Cohn highlighted that U.S. consumer debt has soared to record highs of over $1 trillion, and that consumer spending is persisting despite tightening financial conditions. He said the consumer and the broader economy is “back to a normal, but we all forgot what normal is.”
    “We haven’t seen normal for over two decades. We went through a decade plus of zero interest rates, we went through a decade of quantitative easing, zero interest rates and the Fed trying to see if they could create inflation,” he said.

    “We’ve gone from the Fed not being able to create inflation — we now know the answer, the Fed can’t create inflation, but the market can — to us trying to unwind a shorter term inflationary shock. We’re back into a normal world.”
    He noted that the 100-year average for 10-year U.S. Treasury yields is around 4.5%, and that the 10-year yield has moderated from the 16-year high of 5% logged in October to around 4.3% as of Wednesday morning. Meanwhile, inflation is “running back towards the mean” of between 2% and 2.5%.
    “So every piece of economic data, if you look, is sort of heading back towards its very long term average. If you look at these over 100-year generational cycles, we seem to be running into that phase right now,” Cohn added.
    Correction: The headline of this story has been updated to reflect Cohn’s quote. More

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    U.S. Debates How Much to Sever Electric Car Industry’s Ties to China

    Some firms argue that a law aimed at popularizing electric vehicles risks turning the United States into an assembly shop for Chinese-made technology.The Biden administration has been trying to jump-start the domestic supply chain for electric vehicles so cleaner cars can be made in the United States. But the experience of one Texas company, whose plans to help make an all-American electric vehicle were upended by China, highlights the stakes involved as the administration finalizes rules governing the industry.Huntsman Corporation started construction two years ago on a $50 million plant in Texas to make ethylene carbonate, a chemical that is used in electric vehicle batteries. It would have been the only site in North America making the product, with the goal of feeding battery factories that would crop up to serve the electric vehicle market.But as new facilities in China came online and flooded the market, the price of the chemical plummeted to $700 a ton from $4,000. After pumping $30 million into the project, the company halted work on it this year. “If we were to start the project up today, we would be hemorrhaging cash,” said Peter R. Huntsman, the company’s chief executive. “I’d essentially be paying people to take the product.”The Biden administration is now finalizing rules that will help determine whether companies like Huntsman will find it profitable enough to participate in America’s electric vehicle industry. The rules, which are expected to be proposed this week, will dictate the extent to which foreign companies, particularly in China, can supply parts and products for American-made vehicles that are set to receive billions of dollars in subsidies.The administration is offering up to $7,500 in tax credits to Americans who buy electric vehicles, in an effort to supercharge the industry and reduce the country’s carbon emissions. The rules will determine whether electric vehicle makers seeking to benefit from that program will have the flexibility to get cheap components from China, or whether they will be required instead to buy more expensive products from U.S.-based firms like Huntsman.After pumping $30 million into the project, Huntsman halted work on it. “If we were to start the project up today, we would be hemorrhaging cash,” said Peter R. Huntsman, the company’s chief executive.Callaghan O’Hare for The New York TimesCan the World Make an Electric Car Battery Without China?From mines to refineries and factories, China began investing decades ago. Today, most of your electric car batteries are made in China and that’s unlikely to change soon.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.We are confirming your access to this article, this will take just a moment. However, if you are using Reader mode please log in, subscribe, or exit Reader mode since we are unable to verify access in that state.Confirming article access.If you are a subscriber, please  More

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    Cómo sale el dinero de China

    Las personas chinas acaudaladas han sacado cientos de miles de millones de dólares del país este año, aprovechando el fin de las precauciones por covid que habían sellado casi por completo las fronteras de China durante casi tres años.Están utilizando sus ahorros para comprar apartamentos en el extranjero, acciones y pólizas de seguros. Ahora que pueden volar de nuevo a Tokio, Londres y Nueva York, los viajeros chinos han comprado apartamentos en Japón y han invertido dinero en cuentas en Estados Unidos o Europa que pagan intereses más altos que en China, donde las tasas son bajas y sigue cayendo.La salida de dinero indica, en parte, el malestar existente en China por su vacilante recuperación tras la pandemia, así como por problemas más profundos, como la alarmante desaceleración del sector inmobiliario, principal depósito de riqueza de las familias. Para algunas personas, también es una reacción a los temores sobre la dirección de la economía bajo el liderazgo de Xi Jinping, que ha tomado medidas enérgicas contra las empresas y ha reforzado la influencia del gobierno en muchos aspectos de la sociedad.En algunos casos, los residentes chinos están improvisando maneras de eludir los estrictos controles gubernamentales de su país sobre las transferencias de dinero al extranjero. Han comprado lingotes de oro lo suficientemente pequeños como para esparcirlos discretamente por el equipaje de mano, así como grandes cantidades de divisas extranjeras.Los bienes inmuebles también son una opción. Los chinos se han convertido en los principales compradores de apartamentos en Tokio que cuestan 3 millones de dólares o más, y a menudo pagan con maletas llenas de dinero en efectivo, dijo Zhao Jie, director ejecutivo de Shenjumiaosuan, un servicio en línea de venta de inmuebles en Tokio. “Es un trabajo muy duro contar esta cantidad de dinero en efectivo”.Antes de la pandemia, dijo, los compradores chinos solían comprar estudios en Tokio por 330.000 dólares o menos para alquilarlos. Ahora compran unidades mucho más grandes y obtienen visas de inversión para trasladar a sus familias.El Park Tower Harumi, un complejo de apartamentos de lujo en Tokio que ha atraído a compradores de China continental.Hiroko Masuike/The New York TimesLos jardines del Branz Tower Toyosu, otro proyecto de apartamentos de lujo en Tokio que también ha atraído a compradores de China continental.Hiroko Masuike/The New York TimesEn total, se calcula que este año han salido de China unos 50.000 millones de dólares al mes, principalmente de hogares chinos y empresas del sector privado.Los expertos dijeron que el ritmo de salida de dinero de China probablemente no representaba un riesgo inminente para la economía del país, de 17 billones de dólares, en gran parte porque las exportaciones de muchos de los principales productos manufacturados del país son fuertes, lo que devuelve un flujo constante de efectivo.Una amplia operación para enviar los ahorros familiares a otra parte podría ser motivo de alarma. Las salidas de dinero a gran escala han desencadenado crisis financieras en las últimas décadas en América Latina, el sudeste asiático e incluso la propia China, a finales de 2015 y principios de 2016.Hasta ahora, todo indica que el gobierno chino cree tener la situación bajo control. La salida de dinero de China ha debilitado la moneda, el renminbi, frente al dólar y otras divisas. Y esa debilidad del renminbi ha ayudado a mantener las exportaciones del país, que sostienen decenas de millones de empleos chinos.El flujo de dinero que sale de China “es muy manejable”, dijo Wang Dan, economista jefe para China en la oficina de Shanghái del Hang Seng Bank.Personas comprando joyas en LukFook.Billy H.C. Kwok para The New York TimesLos legisladores chinos siguen recurriendo a algunos de los límites a la salida de dinero del país que impusieron para frenar la crisis monetaria hace ocho años. Otras restricciones que se hicieron entonces, como el escrutinio de las exportaciones e importaciones para detectar estrategias encubiertas de transferencias internacionales de dinero, se dejaron sin efecto y no se han vuelto a imponer este año, a pesar de que se han reanudado las salidas de dinero.La salida de dinero de China ha igualado aproximadamente la entrada de dinero por los grandes superávits comerciales del país. Para consternación de muchos países, sobre todo europeos, China está exportando cada vez más paneles solares, autos eléctricos y otros productos avanzados, incluso cuando ha reemplazado más importaciones por producción nacional.El valor del renminbi cayó a principios de año a su nivel más bajo en 16 años. Durante gran parte de los dos últimos meses, se mantuvo en torno a los 7,3 por dólar, antes de subir un poco en la última semana.En 2015, los inversores que operan a tiempo real observaron fuertes ventas masivas de acciones chinas, cuando la salida de dinero del país provocó turbulencias en los mercados de todo el mundo.Ng Han Guan/Associated PressLa oleada de dinero que salió de China hace ocho años fue provocada por una caída en la bolsa de valores y un intento fallido de devaluar la moneda de forma controlada. El banco central de China tuvo que gastar hasta 100.000 millones de dólares al mes de sus reservas de divisas extranjeras para apuntalar el renminbi.En cambio, China parece haber gastado unos 15.000 millones de dólares al mes desde mediados de verano para estabilizar su moneda, según datos del banco central. “No hay nada que sugiera que sea desordenada”, dijo Brad Setser, especialista en finanzas internacionales del Consejo de Relaciones Exteriores. “La escala de la presión sigue siendo mucho menor que en 2015 o 2016”.Las salidas de 2015 y 2016 reflejaron los esfuerzos de las grandes empresas estatales por trasladar fuertes sumas de dinero al extranjero. En la actualidad, el gobierno ejerce un control político más estricto sobre esas empresas, y no ha habido indicios de una urgencia por movilizar dinero de su parte.En cambio, las empresas privadas y los hogares chinos han estado trasladando dinero al extranjero. Pero gran parte de la riqueza de la gente está anclada a bienes inmuebles, que no pueden venderse fácilmente.Al mismo tiempo, las empresas ilegales de cambio de moneda de Shanghái, Shenzhen y otras ciudades que solían convertir el renminbi en dólares y otras divisas extranjeras fueron cerradas por redadas policiales hace ocho años.Turistas chinos frente al Casino Londoner de Macao en octubrePeter Parks/Agence France-Presse — Getty ImagesTuristas chinos en un ferry durante una excursión a Hong KongBilly H.C. Kwok para The New York TimesY los reguladores han cerrado casi todos los viajes de apuestas a Macao, una región china de administración especial. Estos viajes permitían a los chinos adinerados comprar fichas de casino con renminbi, apostar una parte en el bacará o la ruleta y convertir el resto en dólares.Pekín también ha prohibido la mayoría de las inversiones extranjeras en hoteles, torres de oficinas y otros activos de escaso valor geopolítico. El arquitecto de las restricciones a la inversión extranjera en China, Pan Gongsheng, fue ascendido en julio a gobernador del banco central, el Banco Popular de China.Pero los hogares y las empresas siguen arreglándoselas para enviar dinero al extranjero.Una tarde reciente, las sucursales del Banco de China y del China Merchants Bank en China continental vendían lingotes de oro un 7 por ciento más caros que sus bancos afiliados en la adyacente Hong Kong. Esa diferencia de precios indica que, dentro de China, existe una gran demanda de oro, que puede trasladarse fácilmente fuera del país.Otro truco que están utilizando los residentes de China continental para sacar su dinero es abrir cuentas bancarias en Hong Kong y luego transferir dinero para comprar productos de seguros que se asemejan a certificados de depósito bancario. Según la Autoridad de Seguros de Hong Kong, las primas de las nuevas pólizas de seguro vendidas a los habitantes de China continental que visitan Hong Kong fueron un 21,3 por ciento más altas en el primer semestre de este año que en el primer semestre de 2019, tras casi desaparecer durante la pandemia.Una larga fila frente al Banco de China en Hong Kong el lunesBilly H.C. Kwok para The New York TimesEn una sucursal del Banco de China en la península de Kowloon, en Hong Kong, los habitantes de China continental esperaban a las 7:30 de una mañana reciente para abrir cuentas, 90 minutos antes de la apertura del banco. La fila era tan larga a las 8 a. m. que quien llegaba más tarde tenía suerte de llegar al principio de la fila antes de que terminara la jornada laboral, dijo Valerius Luo, agente de seguros de Hong Kong.Las familias suelen invertir entre 30.000 y 50.000 dólares estadounidenses en productos de seguros, varias veces más que antes, mientras buscan lugares seguros donde colocar sus ahorros, dijo Luo. “Sigue habiendo personas con un capital poderoso”, dijo, “y quieren un paquete de inversión que conserve el valor”.Li You More

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    Fed Officials Hint That Rate Increases Are Over, and Investors Celebrate

    Stocks and bonds were buoyed after even inflation-focused Federal Reserve officials suggested that rates may stay steady.Federal Reserve officials appear to be dialing back the chances of future interest rate increases, after months in which they have carefully kept the possibility of further policy changes alive for fear that inflation would prove stubborn.Several Fed officials — including two who often push for higher interest rates — hinted on Tuesday that the central bank is making progress on inflation and may be done or close to done raising borrowing costs. Economic growth is cooling, reducing the urgency for additional moves.Christopher Waller, a Fed governor and one of the central bank’s more inflation-focused members, gave a speech on Tuesday titled “Something Appears to Be Giving,” an update on a previous speech that he had titled “Something’s Got to Give.”“I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy,” Mr. Waller said. “I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”Michelle Bowman, another Fed governor who also tends to be inflation-focused, said that she saw risks that factors like higher services spending or climbing energy costs could keep inflation elevated. She said that it was still her basic expectation that the Fed would need to raise rates further. Even so, she did not sound dead-set on such a move, noting that policy was not on a “preset course.”“I remain willing to support raising the federal funds rate at a future meeting should the incoming data indicate that progress on inflation has stalled or is insufficient to bring inflation down to 2 percent in a timely way,” Ms. Bowman said.Taken together with other recent remarks from Fed officials, the latest comments offer an increasingly clear signal that central bank policymakers may be finished with their campaign to increase interest rates in a bid to slow demand and cool inflation. Interest rates are already set to a range of 5.25 to 5.5 percent. The Fed’s next meeting will take place on Dec. 12-13, and investors are overwhelmingly betting that the central bank will hold rates steady, as policymakers did at their last two meetings.Investors appeared buoyed by the Fed officials’ comments. Higher interest rates raise costs for consumers and companies, typically weighing on markets. The two-year Treasury yield, which is sensitive to changes in investors’ interest rate expectations, fell noticeably on Tuesday morning, extending its drop through the afternoon. Yields fall as prices rise. The move initially provided a tailwind to the stock market, helping lift the S&P 500 from its earlier fall to a gain of 0.4 percent, before the rally eased and the index drifted lower to an eventual rise of 0.1 percent.Fed officials have been nervously watching continued strength in the economy: Gross domestic product expanded at a breakneck 4.9 percent annual rate in the third quarter. The concern has been that continued solid demand will give companies the wherewithal to continue raising prices quickly.But recently, job growth has eased and consumer price inflation has shown meaningful signs of a broad-based slowdown. That is giving policymakers more confidence that their current policy setting is aggressive enough to wrestle price increases fully under control.Still, as both Mr. Waller and Ms. Bowman made clear, Fed officials are not yet ready to definitively declare victory — data could still surprise them. And while a recent run-up in longer-term interest rates had been helping to cool the economy, the move has already begun to reverse as investors predict a gentler Fed policy path.The 10-year Treasury yield, one of the most important interest rates in the world, has fallen drastically in recent weeks after shooting up in previous months, curtailing a sell-off in the stock market and lifting investor optimism. But higher stock prices and cheaper borrowing costs could prevent growth and inflation from slowing as quickly.“The recent loosening of financial conditions is a reminder that many factors can affect these conditions and that policymakers must be careful about relying on such tightening to do our job,” Mr. Waller said on Tuesday. More

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    Corporate America Has Dodged the Damage of High Rates. For Now.

    Small businesses and risky borrowers face rising costs from the Federal Reserve’s moves, but the biggest companies have avoided taking a hit.The prediction was straightforward: A rapid rise in interest rates orchestrated by the Federal Reserve would confine consumer spending and corporate profits, sharply reducing hiring and cooling a red-hot economy.But it hasn’t worked out quite the way forecasters expected. Inflation has eased, but the biggest companies in the country have avoided the damage of higher interest rates. With earnings picking up again, companies continue to hire, giving the economy and the stock market a boost that few predicted when the Fed began raising interest rates nearly two years ago.There are two key reasons that big business has avoided the hammer of higher rates. In the same way that the average rate on existing household mortgages is still only 3.6 percent — reflecting the millions of owners who bought or refinanced homes at the low-cost terms that prevailed until early last year — leaders in corporate America locked in cheap funding in the bond market before rates began to rise.Also, as the Fed pushed rates above 5 percent, from near zero at the start of 2022, chief financial officers at those businesses began to shuffle surplus cash into investments that generated a higher level of interest income.The combination meant that net interest payments — the money owed on debt, less the income from interest-bearing investments — for American companies plunged to $136.8 billion by the end of September. It was a low not seen since the 1980s, data from the Bureau of Economic Analysis showed.That could soon change.While many small businesses and some risky corporate borrowers have already seen interest costs rise, the biggest companies will face a sharp rise in borrowing costs in the years ahead if interest rates don’t start to decline. That’s because a wave of debt is coming due in the corporate bond and loan markets over the next two years, and firms are likely to have to refinance that borrowing at higher rates.Overall Corporate Debt Interest Payments Have PlummetedAlthough the Fed has rapidly raised interest rates, net interest payments paid by corporations are reaching 40-year lows.

    Note: Data consists of interest paid by private enterprises (minus interest income received) as well as rents and royalties paid by private enterprises.Source: Bureau of Economic AnalysisBy The New York TimesThe junk bond market faces a ‘refinancing wall.’Roughly a third of the $1.3 trillion of debt issued by companies in the so-called junk bond market, where the riskiest borrowers finance their operations, comes due in the next three years, according to research from Bank of America.The average “coupon,” or interest rate, on bonds sold by these borrowers is around 6 percent. But it would cost companies closer to 9 percent to borrow today, according to an index run by ICE Data Services.Credit analysts and investors acknowledge that they are uncertain whether the eventual damage will be containable or enough to exacerbate a downturn in the economy. The severity of the impact will largely depend on how long interest rates remain elevated.“I think the question that people who are really worrying about it are asking is: Will this be the straw that breaks the camel’s back?” said Jim Caron, a portfolio manager at Morgan Stanley. “Does this create the collapse?”The good news is that debts coming due by the end of 2024 in the junk bond market constitute only about 8 percent of the outstanding market, according to data compiled by Bloomberg. In essence, less than one-tenth of the collective debt pile needs to be refinanced imminently. But borrowers might feel higher borrowing costs sooner than that: Junk-rated companies typically try to refinance early so they aren’t reliant on investors for financing at the last minute. Either way, the longer rates remain elevated, the more companies will have to absorb higher interest costs.Among the firms most exposed to higher rates are “zombies” — those already unable to generate enough earnings to cover their interest payments. These companies were able to limp along when rates were low, but higher rates could push them into insolvency.Even if the challenge is managed, it can have tangible effects on growth and employment, said Atsi Sheth, managing director of credit strategy at Moody’s.“If we say that the cost of their borrowing to do those things is now a little bit higher than it was two years ago,” Ms. Sheth said, more corporate leaders could decide: “Maybe I’ll hire less people. Maybe I won’t set up that factory. Maybe I’ll cut production by 10 percent. I might close down a factory. I might fire people.”Small businesses have a different set of problems.Some of this potential effect is already evident elsewhere, among the vast majority of companies that do not fund themselves through the machinations of selling bonds or loans to investors in corporate credit markets. These companies — the small, private enterprises that are responsible for roughly half the private-sector employment in the country — are already having to pay much more for debt.They fund their operations using cash from sales, business credit cards and private loans — all of which are generally more expensive options for financing payrolls and operations. Small and medium-size companies with good credit ratings were paying 4 percent for a line of credit from their bankers a couple of years ago, according to the National Federation of Independent Business, a trade group. Now, they’re paying 10 percent interest on short-term loans.Hiring within these firms has slowed, and their credit card balances are higher than they were before the pandemic, even as spending has slowed.“This suggests to us that more small businesses are not paying the full balance and are using credit cards as a source of financing,” analysts at Bank of America said, adding that it points to “financial stress for certain firms,” though it is not yet a widespread problem.Corporate buyouts are also being tested.Carvana renegotiated its debt this year to defer mounting interest costs.Caroline Brehman/EPA, via ShutterstockIn addition to small businesses, some vulnerable privately held companies that do have access to corporate credit markets are already grappling with higher interest costs. Backed by private-equity investors, who typically buy out businesses and load them with debt to extract financial profits, these companies borrow in the leveraged loan market, where borrowing typically comes with a floating interest rate that rises and falls broadly in line with the Fed’s adjustments.Moody’s maintains a list of companies rated B3 negative and below, a very low credit rating reserved for companies in financial distress. Almost 80 percent of the companies on this list are private-equity-backed leveraged buyouts.Some of these borrowers have sought creative ways to extend the terms of their debt, or to avoid paying interest until the economic climate brightens.The used-car seller Carvana — backed by the private-equity giant Apollo Global Management — renegotiated its debt this year to do just that, allowing its management to cut losses in the third quarter, not including the mounting interest costs that it is deferring.Leaders of at-risk companies will be hoping that a serene mix of economic news is on the horizon — with inflation fading substantially as overall economic growth holds steady, allowing Fed officials to end the rate-increase cycle or even cut rates slightly.Some recent research provides a bit of that hope.In September, staff economists at the Federal Reserve Bank of Chicago published a model forecast indicating that “inflation will return to near the Fed’s target by mid-2024” without a major economic contraction. If that comes to pass, lower interest rates for companies in need of fresh funds could be coming to the rescue much sooner than previously expected.Few, at this point, see that as a guarantee, including Ms. Sheth at Moody’s.“Companies had a lot of things going for them that may be running out next year,” she said.Emily Flitter More

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    Fed’s Waller expresses confidence that policy is in the right place to bring down inflation

    Fed Governor Christopher Waller said Tuesday he is “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”
    Waller added that he could see a point where the Fed might start lowering rates if inflation continues to ease over the next three to five months.
    Governor Michelle Bowman offered a contrasting view, in which she reiterated her belief that more rate hikes likely will be needed as evolving dynamics keep inflation elevated.

    Federal Reserve Governor Christopher Waller said Tuesday he’s growing more confident that policy is in a place now to bring inflation back under control.
    There was nothing in Waller’s prepared remarks for a speech in Washington, D.C., that suggests he’s contemplating cutting interest rates, and he noted that inflation currently is still too high. But he pointed out a variety of areas where progress has been made, suggesting the Fed at least won’t need to hike rates further from here.

    “While I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand, inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained,” he said. “But I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent.”
    Waller added that he could see a point where the Fed might start lowering rates if inflation continues to ease over the next three to five months.
    “It has nothing to do with trying to save the economy. It is consistent with every policy rule,” he said. “There is no reason to say we will keep it really high.”
    A subsequent speech Tuesday morning from Governor Michelle Bowman offered a contrasting view, in which she reiterated her belief that more rate hikes likely will be needed as evolving dynamics keep inflation elevated.
    The commentary comes two weeks before the rate-setting Federal Open Market Committee’s Dec. 12-13 policy meeting. Markets largely expect the committee to hold its key lending rate steady in a target range between 5.25%-5.5%. But Fed officials have stressed the importance of remaining vigilant on inflation and keeping their options open.

    During the central bank’s ongoing battle against inflation, Waller has been one of the more hawkish members, meaning he has favored tighter policy and higher rates. However, he titled his Tuesday speech, “Something Appears to Be Giving,” a contrast to a recent speech titled “Something’s Got to Give.”
    “I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy,” he said.
    Waller cited a variety of areas where activity is moderating, from retail sales to the labor market to manufacturing. He also noted easing in supply chain pressures that were largely responsible for the initial jump in inflation, but he said that factor can’t be counted on to help bring inflation down further.
    “Monetary policy will have to do the work from here on out to get inflation back down to 2 percent,” he said.
    Waller noted easing in inflation gauges such as the consumer price index, which was flat in October and “what I want to see.” However, he said there will be multiple other data points in the next weeks that he will be watching closely, including Thursday’s report on inflation as measured by personal consumption expenditures.
    Core PCE, which excludes food and energy, is the Fed’s preferred benchmark for measuring longer-term inflation trends. For September, it was up 3.7% from a year ago; economists expect October to show a 3.5% acceleration.
    Bowman cited several factors as likely to keep inflation elevated.
    She echoed Waller’s point about supply chains and said further improvements in labor force participation could be limited, a situation that could boost pay as businesses struggle to find enough workers. Also, Bowman noted the uncertainty of future productivity gains due to education disruptions from the Covid pandemic.
    A switch back to heavy services consumption also could boost inflation, as could some sectors of the economy that are not sensitive to higher rates.
    “My baseline economic outlook continues to expect that we will need to increase the federal funds rate further to keep policy sufficiently restrictive to bring inflation down to our 2 percent target in a timely way,” Bowman said.
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