What’s happening to interest rates and could they actually go higher?
There has been a dramatic shift in the past few days in the expectation of where interest rates are headed. This has taken many of us by surprise. It has now become much more important that companies can adapt to a long term higher interest rate environment.
Banks will continue to generate record net margins at the expense of their customers. Bankhawk has worked with many companies whose real cost of banking has doubled since 2022. This is mainly because they have legacy banking arrangements that are no fit for purpose.
We have all found it hard to understand where interest rates are going so I have selected some recent snippets from some expert media sources:
In the Financial Times today (April 18th) the headline was ‘The Great Bet on Interest Rate Cuts is Off’
‘The great bet on rate cuts — and it was enormous — is dead. At the start of 2024, the expectation was for six, maybe seven, US rate cuts this year. That felt silly even then, but it is unravelling in humbling fashion. Today markets are penciling in one, maybe two.’
‘Bank of America has shoved back its call for the first Fed cut from June all the way out to December — a huge jump for a tweak that typically moves in increments of one or two months at a time and that opens up the very real possibility that cuts may not land this year at all.‘
‘Goldman Sachs, which was once in the “five cuts” camp, has now shifted from three to two, starting in July rather than June. Bond prices have dropped and are dragging stocks down with them.’
‘For Jean Boivin, formerly deputy governor at the Bank of Canada and now global head of research at the BlackRock Investment Institute, extra complications set in at the Fed’s rate-setting meeting in December. Then, the central bank kept rates on hold, but also provided no pushback to growing market expectations that they would start to fall quickly, and indeed provided guidance that it would cut three times in 2024.’
In the Wall Street Journal last week the headline was ‘U.S. Might See Interest-Rate Spike’
‘Chase Chief Executive Jamie Dimon warned that U.S. interest rates could soar to 8% or more in coming years, reflecting the risk that record-high deficit spending and geopolitical stress will complicate the fight against inflation.
“Huge fiscal spending, the trillions needed each year for the green economy, the remilitarization of the world and the restructuring of global trade—all are inflationary,” Dimon wrote in an annual letter to JPMorgan Chase shareholders released on Monday.
Once again sounding a cautious note, Dimon said he questioned the optimism in financial markets. He said investors and traders expect the Federal Reserve to engineer a so-called soft landing in which the economy avoids a recession despite a sharp rise in interest rates in recent years.
Dimon said such an outcome, which implies that inflation quickly returns to the Fed’s 2% target from higher levels now, is less likely than subdued bond yields and record stock indexes would seem to imply.
“These markets seem to be pricing in a 70% to 80% chance of a soft landing,” Dimon wrote. “I believe the odds are a lot lower than that.”
But Dimon is still not ready to concede that the risk of extreme volatility has subsided. Dimon said his bank is preparing for a range of scenarios where interest rates could drop as low as 2% or head to “8% or even higher,” based on where the economy is headed. The 10-year Treasury rate recently was 4.42%.’
According to the headline in The Economist from April 17th ‘America’s interest rates are unlikely to fall this year’
‘That will squeeze financial markets and the world economy
For most of the year everyone from stockpickers and homebuyers to President Joe Biden has banked on the Federal Reserve cutting interest rates soon. Over the past two weeks those hopes have been dashed. Annual consumer price inflation in March, at 3.5%, was higher than expected for the third month in a row; retail sales grew by a boomy 0.7% on the previous month. On April 16th Jerome Powell, the Fed’s chairman, warned that the battle against inflation was taking “longer than expected”. Investors had begun 2024 pricing in more than 1.5 percentage points of interest-rate cuts over the course of the year. Today they expect rates to fall by only 0.5 points.
Mr Powell has conducted a pivot upon a pivot. The euphoric expectations for rate cuts took on a life of their own after the Fed turned too dovish in December. That unduly stimulated the economy and will force the central bank to retrace its steps, and then some. The consequences of higher-for-longer interest rates will reverberate around America, financial markets and the world economy.’
Bankhawk is helping companies to navigate this difficult environment. According to Founder & CEO Brian Weakliam the mantra for interest rates is now ‘higher and for longer’ which means that companies must reconfigure their banking arrangements and protect themselves against higher costs and losses of revenue.
