The relationship between the Federal Reserve’s (Fed) rate hike cycles and subsequent economic recessions has been a subject of extensive analysis.
After reviewing data spanning 70 years, a trend emerged—from the first rate hike, it takes three years, on average, to see the onset of a recession. As is the case with the law of averages, some recessions kicked-off earlier and others took several additional years before they were triggered.
As the Fed recently halted rate hikes, concerns are mounting regarding the potential for an impending recession, especially in light of the prevailing corporate debt situation and the sentiments among business leaders.
Recently, the Fed halted its rate hike cycle, prompting analysts and business leaders to weigh the implications.
A significant 84% of CEOs anticipate a recession in the near term, within the next 12 to 18 months, according to various reports.
Their pessimistic outlook aligns with the historical trend of recessions following a halt in Fed rate increases, and is further exacerbated by the massive corporate debt burden that many companies are shouldering and looming over the broader business landscape.
The corporate debt scene is indeed grim, with Moody’s anticipating the US corporate debt default rate to surge to nearly 6% by the end of 2023, from 2% in 2022.
S&P Global shares a similar sentiment, projecting default rates for US and European sub-investment grade companies to climb to 4.25% and 3.6% respectively by March 2024.
The principal concern is the renewal of this massive debt burden at higher interest rates, which could trigger a surge in defaults.
A glaring example of this precarious situation is the recent bankruptcy warning by WeWork.
Once valued at $47 billion, the company saw its shares plummet near zero as it warned of a potential bankruptcy, citing “substantial doubt” about its ability to continue operations due to financial losses and projected cash needs.
This dramatic turn of events for WeWork highlights the broader issue of corporate vulnerability in the face of rising interest rates and mounting debt.
Given these converging factors—the historical trend post rate hike cessation, the prevailing corporate debt burden, and the bleak outlook shared by a significant portion of business leaders—the economic horizon appears to be slowly overtaken by a looming storm.
If the pattern holds true, and the CEO’s forecasts materialize, we might be inching towards a recession that could be further aggravated by a corporate debt crisis.
The precise timing of such economic downturns remains elusive, heavily contingent on a myriad of economic variables and policy decisions.
Nonetheless, the unfolding scenario underscores the need for a prudent and proactive approach in navigating the complex economic terrain.
Maintain a keen eye on the Fed’s future actions, an understanding of corporate debt dynamics, and a vigilant monitoring of market signals could provide invaluable insights in navigating through the impending economic turbulence.
Take your seat.
It might be a bumpy ride.
But fingers crossed for a soft landing.