The Federal Reserve System just announced an aggressive interest rate cut of 50 basis points on the back of last week’s rate cuts by European Central Bank, inflation nearing 2% (same as in EU and UK), and 12% YTD gas price reduction.
However, wage inflation is still trending high, especially in unionized sectors. Unemployment is still at 4.4% (neither bad nor good), and we will never go back to the days of easy money, i.e., Trillion dollars of bonds selling at negative rates.
And therein lies a potentially big issue looming over Corporate America.
Most American companies borrowed heavily on longer-term 3-5-year low-rate deals in 2020 and 2021, BEFORE the Fed tightening cycle got underway (this also showed in the strong S&P 500 performance during the high-interest period to date). These low-interest deals are set to expire in 2024-2026 and will now face refinancing at 5.5%-6%, a staggering uptick to the borrowing costs on the books for Corporate America – most prominently in the Manufacturing sector.
Final say (reality is more than meets the eye):
- Monetary easing always has a lag between adjustment and impact
- Half basis point reduction is not typical unless the Fed is sensing an undercurrent of sluggish growth (last such cut was at the start of the pandemic)
- In this scenario, monetary easing may NOT be the panacea for American corporations staring at way higher Refi rates once their low-interest deals expire soon and,
- Consequently, EBITDA pressures will continue to cast a shadow on American corporations in the foreseeable quarters.