Path to Lower Rates Won’t Be Uniform
Due to the confluence of locked-in low interest rates and robust corporate earnings, net interest payments as a percentage of operating surplus have actually declined and are at multi-decade lows.
Fed Hikes: Limited Impact on Corporate Balance Sheets
The Fed’s recent rate hiking cycle did not produce the anticipated effects on US corporate performance. Typically, one would expect that rising interest rates to lead to higher debt servicing costs for businesses. However, US corporations have used the ultra-low interest rates post COVID-19 to lock-in low interest rates for their debt. Consumers also utilized this near-zero interest rate regime to lock in mortgages at favorable rates, subsequently resulting in rate hikes having limited negative impacts. Moreover COVID-19 relief packages from the federal government made sure consumer spending rebounded quickly after the pandemic lockdowns, which kept economic growth buoyant.
Today, due to the confluence of locked-in low interest rates and robust corporate earnings, net interest payments as a percentage of operating surplus have actually declined and are at multi decade lows, as shown in the chart below. All this despite the aggressive rate hikes over the last couple of years.
This does not mean that there has not been negative effect from interest rate hikes on corporate balance sheets. Smaller companies suffered more than large companies. They rely more heavily on floating rate debt or need to refinance more frequently.
Now as the Fed begins to cut rates, smaller companies should benefit from a reduced interest rate burden. However rates across the curve have moved in different directions and the recent spike in 10 year yields suggest that the path to lower rates will not be uniform. To learn about our macroeconomic views, read our latest version of Weekly Economic Perspectives.