3 July 2023 (David Reavill) A Federal Reserve Research Note was released early this morning and is already creating quite a stir on Wall Street. And there’s lots to chew over in this report. Street Analysts and Pundits are already pointing out that the study concludes that there are currently more firms experiencing financial stress than at any time since the 1970s. 37% of non-financial firms are having a hard time paying their bills. That’s enough to send any analyst back to their spreadsheets. It’s been a long time since Corporate America was this weak.
But the more important message from researchers Anders Perez-Orive and Yannick Timmer is their estimate for when the full effect of all this monetary tightening (higher interest rates) will fully impact the economy. According to Perez-Orive and Timmer, their research indicates that the full impact of tightening usually occurs one to two years after the Fed starts to hike rates.
The Fed began raising rates in March of 2022. But then by only a quarter percent, and from a very low level. So it’s reasonable to assume that those first few interest rate hikes had little effect on the economy. It was only with later hikes that interest rates started to impact business. That means that only now, after that one-year lag, is the real squeeze starting.
Put another way, the Fed has been raising rates for over a year now without seeing the real impact of tightening. Making the possibility that the Fed has already “overshot” its target very reasonable.
So, as the Fed talks about raising rates even more, remember we are yet to see the real impact of what they’ve already done.
Read the Report here:
