International Forecaster Weekly

Are Markets Bewitched by The FED as Business Buys Into “Higher For Longer”

Investors have itchy fingers these days – or perhaps it’s just the way they have their high frequency computer algorithms programmed. 

Either way, it’s why analysts like Felix Salmon see markets “trembl[ing] at the Fed's every twitch.” And yet, he points out, it doesn't seem to be having much effect on the economy.

Salmon adds that the Fed's main policy tool — even more important than setting interest rates or printing money — is the trust that Americans have in it to do the right thing. 

According to recent surveys, a majority of Americans believes the U.S. is in an ongoing recession that the Fed has not only failed to prevent but is seen as having caused it (or is on the verge of causing it).

Analysts say the economy is running hotter than it should be, that the job market remains tight with headline unemployment at historic lows, and that mixed signals abound about the scope of the coming downturn.

Guest Writer | March 8, 2023

By Dave Allen for Discount Gold & Silver

Investors have itchy fingers these days – or perhaps it’s just the way they have their high frequency computer algorithms programmed. 

Either way, it’s why analysts like Felix Salmon see markets “trembl[ing] at the Fed's every twitch.” And yet, he points out, it doesn't seem to be having much effect on the economy.

Salmon adds that the Fed's main policy tool — even more important than setting interest rates or printing money — is the trust that Americans have in it to do the right thing. 

According to recent surveys, a majority of Americans believes the U.S. is in an ongoing recession that the Fed has not only failed to prevent but is seen as having caused it (or is on the verge of causing it).

Analysts say the economy is running hotter than it should be, that the job market remains tight with headline unemployment at historic lows, and that mixed signals abound about the scope of the coming downturn.

            Yes, another recession is inevitable eventually. But economists' forecasts for when it might arrive keep getting pushed back.

If the economy does fall into a traditional recession soon, it'll be because the Fed has been hiking rates more aggressively than any time since 1980.

Salmon says a lot of Americans who believe we're in a recession are deeply upset about inflation.

Inflation has certainly moderated somewhat since the Fed started tightening. But it's far more questionable whether inflation is coming down because of Fed hikes.

"The increase in interest rates has slowed several sectors of the economy, most notably housing and commercial real estate," Atlanta Fed president Raphael Bostic said last week.

"However, other parts of the economy have not slowed so much. Consumer spending has remained robust," he said, adding that GDP growth figures are still running "stronger than expected."

Investing in Higher for Longer

And now, more company executives are buying into the “higher for longer” line about interest rates.

How do we know? Kate Marino shows how they’re running up the debt market now before borrowing costs go up even more. 

She calls it “a capitulation to the new reality. It’s a behavior shift from last year, when rising rates had many companies sitting on the capital markets' sidelines.”

The investment grade bond market, where companies with higher credit ratings – typically AAA, AA, A and BBB – borrow, saw a record February for new bond placements despite soaring yields.

The month's final tally of $147 billion far exceeded projections of $90-$100 billion, according to Marino.

A key index that measures the market jumped from yielding 4.9% on February 2nd to 5.56% at the end of the month.

Remember how corporate bond issuance slowed considerably last year – because rate volatility made it difficult for bankers to place deals with investors?

Plus, many companies freaked at yields that were a lot higher than anything they'd seen in the investment-grade market over the last decade.

Companies are now warming – albeit reluctantly – to the idea that we may not be returning to the low-rate world of the last decade anytime soon.

For those who’ve been hoping that rates would eventually return to pre-pandemic levels once inflation is under control, it helps to figure out what or when those before-times were.

As shown on the chart above, the 10-year Treasury, the primary metric for corporate borrowing, was below 3% for only two periods in modern history — the post-Great Depression and post-Great Recession eras. 

Robert Tipp at PGIM Fixed Income observed, “The level of rates that we had from 2012 to 2022, we've never seen that before except after the Great Depression and World War II.” 

Tipp believes that all the recent data pointing to the strength of the economy and labor market amid the rapid rate hikes means the neutral interest rate may very well have moved up.

In its most basic form, the neutral interest rate is the short-term interest rate that would prevail when the economy is at full, or maximum, employment and stable inflation.

Thus, if the 10-year yield settles into a range that’s more consistent with historical averages than the 2010s, it could reshape borrowing strategies for corporate America, which got pretty used to ultra-cheap money.