December 11, 2023

The Federal Reserve isn’t trying to ruin the economy with its efforts. Still, it’s not willing to ease up on interest rates just yet.

Fed chair Jerome Powell is more focused on the labor market than inflation at this point. He said he’s willing to keep rates high through next year, if that’s what it takes to get the job done.

Rising bankruptcies are evidence of companies struggling to stay afloat. It’s even harder now because financing is so expensive (if banks will lend at all). Typically, this is when the Fed would ease interest rates. But instead, they’re at a 22-year high and not budging it seems.

Additionally, two concerning signs suggest more trouble could be on the horizon.

The first is that companies aren’t borrowing. October was the slowest month for borrowing so far this year. Across investment grade bonds, high-yield bonds, and leveraged loans, U.S. companies only borrowed about $70 billion. That was the worst October of lending since 2011 and the lowest number of monthly transactions in 20 years. So, the corporate borrowing window is closing.

On its own, this may not be a big deal. But the second concerning sign is corporate America’s debt bill is coming due.

U.S. companies have about $100 billion of debt due this year, $250 billion next year, and $389 billion in 2025. And already we’re seeing an uptick in defaults, from 2.5% in March to 4.0% in October.

Unfortunately, it could get worse. High interest rates make corporate borrowing costs more expensive. That leads companies to issue less debt.

So, it seems that starting next year it’s going to become increasingly difficult for companies to meet all their financial obligations. Interest costs will increase significantly in the next couple of years.