Quiver Quantitative - Despite the Federal Reserve's accelerated tightening measures to combat inflation, corporate America remains relatively unfazed. The yields investors seek for risk in the U.S. investment-grade and high-yield bond markets are still beneath their two-decade averages, even as borrowing is thriving. In a surprising twist, recent financial disclosures from some of the nation's most leveraged corporations have outperformed expectations. These developments follow the Fed's dramatic rate hikes—its most rapid in 40 years, reaching a 22-year peak—and has prompted speculation regarding the effectiveness of current interest rates or the necessity for further elevation.
The resilience of the credit landscape is puzzling many, especially in light of the rapid rate increases by the Federal Reserve. Jeremy Stein, a former Fed Governor, now teaching at Harvard University, expressed astonishment at the robustness of the credit market despite such aggressive rate hikes. While the Federal Reserve's decisions primarily influence Treasury yields, other economic indicators, such as equity and oil prices, continue to remain steady. This resilience underscores a prevailing Wall Street debate: will there be a need for further rate hikes, or should the current policy be given ample time to permeate robust household and corporate financials?
Federal Reserve Chair Jerome Powell, addressing the uncertainties around policy lags, emphasized the need for patience and allowing current monetary policy to take effect. With another meeting slated this week, all eyes are on the Fed's next steps. Notably, some policymakers believe more hikes could be on the horizon, given the present economic data strength, with factors such as robust hiring, sustainable consumer spending, and surging inflation. However, as rates remain steady, there's an increasing belief among investors that the rate-hiking phase might be nearing its end. This perception could inadvertently relax financial conditions further, thereby stimulating economic growth—a scenario that may not be favorable given the Fed's objectives.
Corporate America, particularly giants like AT&T (T) and Amazon (NASDAQ:AMZN), continues to thrive, bolstered by the enduring strength of the U.S. consumer. Low default rates coupled with healthy balance sheets have kept credit spreads in check. Surprisingly, debt upgradation from the lowest rating tier of investment grade has hit a record this year, as per Barclays (LON:BARC) Plc. Despite these positive indicators, there are emerging signs of strain, such as rising consumer delinquencies and weakening fundamentals in renowned companies. The Federal Reserve finds itself in a delicate position, balancing between over-tightening, which might push the economy into a recession, and under-tightening, which could prolong inflation.
This article was originally published on Quiver Quantitative