PERSPECTIVES

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):

1. Monetary easing always has a lag between adjustment and impact
2. 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)
3. 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,
4. Consequently, EBITDA pressures will continue to cast a shadow on American corporations in the foreseeable quarters.

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