The Federal Reserve’s upcoming decision on interest rates is a hot topic this week, with many wondering how long the Fed will choose to keep rates high. Some investors are more interested in where the year-end 2023, 2024, and 2025 dot plots end up, and what real fed funds rate will be targeted in the coming years. Keeping rates at high levels for longer is a form of monetary tightening, as people with adjustable-rate mortgages face higher rates each day, businesses have higher debt refinancing costs, and projects become more expensive to start. For years, financing availability will decrease unless the Fed keeps rates high.
Startups are struggling to stay in business as funding from venture capitalists and bank loans becomes scarce and expensive. Some business models that worked when cash was cheap are now unsustainable, and venture-backed startups are running out of money. The credit crunch has arrived, and if capital costs remain high, it will take years to play out. Small and medium-sized businesses have to pay interest rates of over 10% on loans if they can even get one. These businesses worked well in the past when interest rates were lower, but they now struggle to survive in the current economic climate.
For the week ended May 31st, commercial and industrial loans outstanding remained little changed from the previous week’s lowest level since October 2022. Bank deposits took a hit, but have now rebounded for three straight weeks, with banks raising deposit and CD rates to bring back lost deposits and retain existing ones.
The Bank of Japan’s meeting on Friday is not expected to see any changes, but May PPI saw a .7% m/o/m drop, with wholesale prices gaining 5.1% y/o/y vs April’s 5.9%. While manufacturing prices’ slight drop month over month helped, there was also a significant reduction in utility prices of 8.3%. After hitting a high point since 2015, Japan’s 10-year inflation breakeven fell by 1.6 bps to 1.05%.
Investors are closely watching these trends as they prepare for a potential major takedown in the economy and global markets. Experts advise preparing for the worst and taking steps to optimize financial portfolios.
