As expected, the Fed delivered a 25 bps hike to put official interest rates at a 22 year high. And Powell communicated they will hike again in September and then pause and evaluate. It’s quite remarkable that despite having delivered the most aggressive hikes in a few decades, the economy is not in a recession and the impact on unemployment and corporate profits has not materialized yet. The chart below helps understand why. During #zirp companies where able to issue cheap debt with very long durations. That has kept interest expense very low relative to earnings, despite the #ratehikes. But as you can see the correlation between official rates and interest expense is high and positive, and right now they’re going in opposite directions, until it’s time to renew the debt, and then the effect will hit their finances hard. When it does, defaults will go up, corporations might need to cut costs, and unemployment will rise. And the cycle will begin again.
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