December 04, 2023
Although momentum seems to be in equities investors’ favor, the Federal Reserve isn’t budging on interest rates. Instead of easing credit availability, the central bank is holding strong at its tightest policy rate in quite a while.
The Fed last kept its target rate in the 5.25%-5.50% range. While lower than the recent past, it’s still a peak since early 2001. With rates so high, individuals and businesses aren’t as willing to borrow, and those who need to borrow aren’t looking so good.
Unsurprisingly, banks are getting nervous and making it hard to access credit. Also, bankruptcies are up.
According to S&P Global Market Intelligence, corporate bankruptcies are running at a rate we haven’t seen since 2020, with the numbers having been higher only one other time in the past 13 years. This situation resembles times after periods of intense economic turmoil, like the 2020 pandemic and back in 2010.
In the past, the Fed stepped in to help. It recognized the pain, responding with stimulus and bank lending programs, as well as cutting interest rates to nearly 0%.
Yes, some companies still went bankrupt. But the Fed kept the bankruptcy tsunami at bay. In 2010, the fourth quarter produced just 21% of the year’s bankruptcies. In 2020, it was only 19%. Thus, economies were improving in those cases. That may not be true today.
As of now, the Fed’s not backing down. Employment numbers continue to beat expectations, signaling a humming economy, which isn’t what the Fed wants. While inflation is still above 3.0% and bankruptcies are on the rise, the central bank’s job isn’t finished yet.