While Wall Street is buoyed by expectations for a 2024 US interest rate cut, the real world is still far from over the effects of monetary tightening.
Over the past two years, the central bank has been aggressively tightening in an effort to curb inflation. That will raise borrowing costs for businesses and consumers, which is expected to continue weighing down spending next year.
“The bottom line is that the pain caused by the Fed’s interest rate hikes will continue into 2024,” said Torsten Slok, chief economist at Apollo Global Management. “The economic depressing effects are not going to go away anytime soon,” he said.
As rising interest rates spread throughout the economy, Bloomberg Economics predicts that the global economy will experience the slowest growth in 2024 since 2001, excluding the financial crisis and the coronavirus pandemic. Even if the economy achieves a soft landing, large amounts of debt will mature over the next few years, raising the cost of refinancing some companies and potentially causing them to default. Consumer credit is already under pressure, and local banks are facing a hit from commercial real estate writedowns.
The question now is whether central banks, which underestimated the threat of inflation, will now cut interest rates too slowly and be unable to stem the economic slowdown.
Analysis by Citigroup economists this year suggests that the decline in credit quality shown in the U.S. and Eurozone lending surveys could reduce real growth rates in both regions by as much as 1% to 2% by the end of next year. . “We expect spending to continue to soften in interest rate-sensitive categories as the effects of monetary policy persist,” said Stuart Paul, an economist at Bloomberg Economics.
Some economists disagree that the pain from monetary tightening will last, and pessimists predicting a recession are actually decreasing.
Still, there is no doubt that the situation remains difficult for household finances. Household budgets are being drained by soaring prices for goods and services, as well as rising rent and credit card interest rates.
Mark Schneider, chief executive officer of food giant Nestlé, said that with the high inflation of the past two years, “it’s no surprise that consumers are struggling to make ends meet.” In addition, monetary tightening “has now reached the real economy. Rising mortgage rates, lease fees, rents, etc. are making consumers more wary,” he said in an interview with Bloomberg TV.
US Consumers Say Credit is `Much Harder’ to Come By
Availability of debt has changed markedly, survey shows
Source: Federal Reserve Bank of New York
“Even if the Federal Reserve begins to ease policy, it will take time for the more accommodative environment to ripple through the economy and be reflected in consumer borrowing costs,” said Wells Fargo economist Shannon Seeley. “It will take some time.”
Companies are starting to feel the pain, too. Toy maker Hasbro has announced it will cut nearly 20% of its workforce due to weak sales during the crucial holiday shopping season. Ford Motor Co. has significantly reduced its 2024 production target for its flagship electric vehicle (EV), the F-150 Lightning, because customers are avoiding the high price tag. Nike has said it aims to cut costs by up to $2 billion (approximately 284 billion yen) by cutting staff and simplifying its product lineup amid a weakening sales outlook.
Vishwas Patkar and other Morgan Stanley strategists say they expect more corporate bond downgrades. The reason is that the slow-acting effects of suppressive monetary policy will continue, hurting both cash flow and the ability of underperforming companies to repay their debts.
risk to the bank
In 2023, a global bank called Credit Suisse was forced into bankruptcy. In the United States, a financial crisis occurred at a regional financial institution, and major banks, the government, and regulatory authorities needed to intervene to prevent the crisis from spreading.
The successive failures of regional banks began with losses in their securities portfolios. The slump in commercial real estate (CRE) loans threatens to hit many small and medium-sized financial institutions in the coming years. According to Trepp research, $2.8 trillion in CRE debt matures between next year and 2028, much of it held by banks.
Almost $3 Trillion of US CRE Debt Matures Through 2028
Banks have the biggest exposure to commercial real estate lending
Source: Trepp Inc., Federal Reserve
news-rsf-original-reference paywall">Original title:Euphoria on Fed Pivot Prospects Ignores the Lagging Hangover (1)(excerpt)
2023-12-25 18:09:00
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