Will Zombies Scare the Fed Out of Raising Interest Rates?
A recent article in Bloomberg, headlined “Massive U.S. Debts Could ‘Trap’ Powell as Fed Fights Inflation,” suggests that an army of zombies (defined as firms that don’t generate enough cashflow to service their debt payments), near zombies and others companies that are carrying so much debt that a hike in the interest they pay could be debilitating, will limit how much the Federal Reserve can increase interest rates.
Bloomberg estimates that that more than 20% of the Russell 3000 fit into the zombie category, while also noting: “The average credit rating of companies has been declining, according to Moody’s—an early warning that some of them could run into problems with paying what they owe if debt service costs rise.”
The article quotes Torsten Slok, Chief Economist at Apollo Global Management as saying: “The economy is more vulnerable than it has ever been before to rising interest rates. How much can the Fed raise rates? And the answer is, they can actually not raise rates that much.”
“Debt Is On The Rise, Increasing Risks For Many Households.”
That’s the headline for a recent article in Forbes that reads in part: “Households are sinking deeper into debt. … It grew by a non-inflation amount of $305.1 billion in the third quarter of 2021. Those three months capped the 10th quarter in a row, during which household debt has grown.”
One ominous way of looking at household debt, is that, according to Forbes, debt stood at 98.8% of after-tax income. The article notes: “The pandemic did not put a stop to Americans’ borrowing, even amid faster income growth.”
The New York Times Reports that Saving Accounts are Draining for Many Americans.
Last year there were some optimistic reports of increased savings for American households, but for many middle and lower income households the boost came from government stimulus checks, supplemental unemployment support and similar programs, that have since been discontinued.
The New York Times reports that the savings accounts of many are quickly draining. It cites research by the JPMorgan Chase Institute, which assesses the bank accounts of 1.6 million families, found that low-income families experienced the “greatest percent gains” during each round of stimulus, yet also exhausted their balances faster, noting: “That’s in part because those households went into the crisis with the thinnest financial buffers.”
The article also quotes Mark Hamrick, Senior Economic Analyst at Bankrate, the personal finance company, as saying: “There’s a significant cross-section of the American public which is financially fragile.”
“Credit Card Issuers Must Prepare for Another COVID Wave.”
That’s a recent headline from Credit and Collection News, reporting on a new study from the Mercator Advisory Group pointing to the impact on “household budgets as inflation grows, interest rates increase, and the workplace continues to be disrupted.”
The study suggests that remedies offered during the early months of the pandemic, might not be available now, writing: “The economic relief programs offered by the U.S. and many other countries might be impossible if the pandemic rebounds.
Credit card issuers must keep a keen eye on the impact of inflation, rising interest rates, and employment. Issuers underwrite with higher spreads than ever, but the interest opportunity may not be sufficient if credit losses shift.”
“Will the Omicron Variant Dampen Economic Recovery?”
That’s a question being asked by just about everyone—including in the headline from a National Association of Credit Management article. Omicron has—at least so far—been kind of a classic bad news/good news situation.
The bad news being that it is extremely infectious, and the good news being that it doesn’t appear to cause illness as severe as previous variants—especially for those who have been fully vaccinated and boosted.
The NACM article includes this chilling outlook from Robin Brooks, Chief Economist at the Institute of International Finance: “These mutations keep coming. What is the probability that sometimes we get a really nasty one? No one has any idea. This thing is mutating, and it’s very, very hard to say.”
The article also quotes Sung Won Sohn, an Economics and Business Professor Loyola Marymount University in Los Angeles, as saying: “History is repeating itself with the COVID virus suddenly reappearing and dampening economic growth prospects.”
Ray Peloso, Chief Customer Officer at Finvi, brings 25 years of diverse consumer lending experience, having held executive leadership roles at Royal Bank of Scotland, Capital One, Citibank, MBNA and Katabat. Ray’s prior expertise in consumer credit and lending underpins a clear vision and understanding of the challenges faced by our clients in today’s rapidly evolving digital economy.
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