The Federal Reserve Warns of Severe Economic Shockwave
The Federal Reserve has issued a fresh warning about the state of the US economy. According to a research note published by two Federal Reserve economists, the number of non-financial firms currently experiencing financial distress is at historically high levels. The economists state that the tightening of US monetary policy since March 2022 has led to this situation. They estimate that the true impact of the Federal Reserve’s sharp interest rate hikes may be significant and looming.
Key Points:
- The share of non-financial firms in financial distress is higher than during previous tightening cycles.
- The number of distressed firms now stands at 37%.
- Total investment in publicly-listed firms accounts for about 60% of aggregate US investment.
- Distressed firms currently make up around 37% of all firms, indicating that recent policy tightening may have stronger effects on investment, employment, and aggregate activity compared to previous cycles.
- The effects of these policies are expected to peak around 2023 and 2024.
A Warning of Potential Default and Layoffs
The Federal Reserve warns that its own policies may push distressed companies closer to default, potentially triggering unexpected layoffs. The economists believe that their analysis underestimates the true impact on employment, as policy tightenings could push some distressed firms into bankruptcy. These bankruptcies and associated job losses would not be reflected in the data, meaning that the effects on employment could be greater than estimated.
Hot Take:
The Federal Reserve’s warning on the high level of financial distress among non-financial firms is concerning. The potential impact on investment, employment, and overall economic activity is significant. It is crucial for policymakers to carefully consider the consequences of further interest rate hikes and tightening measures, as the effects could be more severe than anticipated.