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The Federal Reserve thinks catastrophe is coming for US businesses
Why the Dow plummeted after the Federal Reserve set interest rates at 0%
Phil Rosen
Thu, June 29, 2023 at 3:00 AM GMT+8 · 4 min read
This originally appeared in Insider’s 10 Things Before the Opening Bell newsletter.
1. Researchers at the US central bank just published a paper warning that a historic surge in the percentage of distressed American companies could worsen the fallout from the Fed’s inflation battle.
Plainly, they said high borrowing costs could cause a huge number of companies to crumble.
“The share of nonfinancial firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s,” Ander Perez-Orive and Yannick Timmer wrote.
The Fed’s 10 consecutive interest rates — intended to quell historically high prices — threaten to hammer business investment, employment, and economic activity.
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Now, the economists said, it’s possible that debt-ridden companies will avoid spending money on new developments or facilities, hiring, or production.
The full extent of the damage remains to be seen, but as of now, the central bank authors said about 37% of firms are in trouble.
That is, more than a third of companies could default in the coming months, thanks to tightening monetary policy.
Pardon the jargon, but here’s how the researchers put it:
“Our hypothesis is that following a policy tightening, access to external financing deteriorates more for firms that are in distress than for healthy firms, while following a policy easing, external financing conditions do not change appreciably enough for the two groups of firms to trigger a differential response.”
Got it?
It’s okay, I didn’t either the first time around.
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Basically, they are predicting that companies feel pain in times of policy tightening, especially those with weaker balance sheets to begin with.
But at the same time, loosening of policy doesn’t necessarily translate to smoother sailing in the same way.
Source: Yahoo Finance
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