Marija Veitmane, the head of equity research at State Street Global Markets, recently sounded a cautionary note regarding the potential ramifications of the Federal Reserve delaying interest rate cuts. Her concerns stem from the belief that such a decision could trigger an economic crash, leading to what she describes as a “no landing then a crash” scenario.
Veitmane underscores that the adverse effects of postponing rate cuts are already being felt across various sectors of the economy, despite relatively strong growth indicators in the last quarter. For instance, companies are grappling with heightened debt refinancing costs, a consequence of elevated interest rates. Data from Moody’s reveals that AAA long-term corporate bond yields surged to 5.28% in April, indicating increased borrowing expenses for businesses.
Similarly, consumers are bearing the brunt of rising borrowing costs, with commercial bank rates on credit cards soaring to 21.6% in February. This marked the highest level in at least three decades, as per Federal Reserve data. The burden of increased borrowing expenses on households is evident, exerting pressure on consumer spending and overall economic activity.
Retail spending, a key driver of economic growth, is exhibiting signs of slowdown as consumers adopt more cautious spending habits. Veitmane points to recent earnings reports from consumer-centric companies like Starbucks, which experienced its weakest quarterly performance in recent history, excluding periods marred by the pandemic and the 2008 Recession.
The overarching concern is the potential for a looming recession, as economists have long cautioned that sustained high interest rates could push the economy into a downturn. Despite the current robust GDP growth and a buoyant job market, the Federal Reserve remains circumspect about loosening its monetary policy due to lingering worries about inflationary pressures.
Market sentiment reflects a cautious approach, with most investors anticipating the Federal Reserve to maintain interest rates at their current levels during the upcoming policy meeting. While earlier market expectations leaned towards multiple rate cuts, the prevailing consensus has shifted to only one or two cuts for the year. Nonetheless, Veitmane’s warning underscores the significance of proactive measures to address mounting economic pressures and mitigate the risk of a destabilizing economic downturn.
