Why one more Fed rate hike might be too much, according to CFOs

  • The Federal Reserve is expected to raise rates by a quarter percent on Wednesday.
  • According to CFOs from across the economy who serve on the CNBC CFO Council, this could be the Fed’s final rate hike in the current monetary policy cycle.
  • They tell CNBC that the central bank may not be paying enough attention to economic indicators to argue that despite higher incomes, consumers are weakening, loan defaults are sharply higher and unemployment is at risk of rising. Its inflationary struggle.

Federal Reserve Chairman Jerome H. Powell testifies before a U.S. Senate Banking, Housing and Urban Affairs Committee hearing on the “Semiannual Fiscal Policy Report to Congress” on March 7, 2023, on Capitol Hill in Washington, U.S.

Kevin Lamarck | Reuters

The labor market is still tight, but hiring is cooling quickly and job losses are rising. The yield curve has already been flashing recession for some time, and the index of leading economic indicators is having one of its worst runs. But the Federal Reserve is focused on one path this time: Inflation is still the only focus, and the Federal Reserve will raise rates on Wednesday after last week’s Personal Consumption Expenditure Index report showed prices rose again. That’s the market expectation — this week’s CNBC Fed survey of economists and money managers was unanimously optimistic of a quarter-percentage-point hike.

But inside big companies, executives are seeing signs of growing trouble for the economy and with another interest rate hike looming, it may be time for the Fed to hold off. That was the tone of CNBC’s CFO Council on Tuesday’s call with chief financial officers from several sectors of the economy. The call, which was held against the backdrop of allowing CFOs to speak freely, found that CFOs at big companies were narrowly focused on the central bank’s fight against inflation as conditions worsened for consumers and health.

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One concern voiced by CFOs is that the top end of the consumer market is masking deeper problems in the economy, with companies tracking a rise in credit delinquencies that are now starting to spread. Pressure on consumer credit, which has risen sharply since May of last year, has been concentrated in the lower FICO segments, but a year later, credit weakness is seen in the primary sector, among consumers with higher credit scores. Across FICO bands, there has been a recent increase of 40% to 60% in higher delinquencies in installment lending, according to data shared on the CFO call.

Non-prime lenders are getting higher FICO score credit as more cautious lenders in the prime space have aggressively backed away from startups ranging from credit unions to large consumer financial services. While that’s good for them, “we’re definitely moving toward a recession,” said one CFO. “They’re trying to fight a problem, but there’s evidence around the U.S. that says the economy is sluggish. Give things time to catch up. You don’t want to hike into that environment.”

Some notable voices from former Fed officials have sent a similar message, including former Boston Fed President Eric Rosengren and former Dallas Fed President Robert Kaplan.

Some of the issues cited by CFOs with consumers are already well-known and well-monitored, including consumers retreating from discretionary spending to non-discretionary essentials and stimulus savings for low-income Americans already draining. But even as inflation in groceries, utilities and rents moderates and unemployment remains low, the latest data on working hours show a decline, and smaller wages stretch further. “That’s concerning,” said one CFO.

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“I worry about the damage it’s doing,” said another CFO of the Fed’s continued rate hikes. “When it comes to unemployment, it goes up and down the risk spectrum,” the CFO said, referring to all FICO score-based consumer buckets.

While CFOs say they understand the Fed’s confusion as inflation remains stubborn, they are equally concerned that the data the Fed is focusing on is “a little behind,” one CFO said. An example is falling energy prices. “I don’t know if they’re[theFed[thinkingaboutthat…they’regoingtoraisethey’regoingtoraisewecanstopitbutIbelievewe’reinaplacewhereit’sgoodtopauseandseewhatit’sgoingtobelikeinthenextthreetosixmonths”[theFed[thinkingaboutthat…they’regonnaraisethey’regonnaraisewecanstopthatButIdobelievewe’reatapointwhereit’sprobablygoodtopouseandseehowthisplaysoutoverthenextthreetosixmonths”[மத்தியவங்கி[அதைப்பற்றிசிந்திக்கிறார்களாஎன்றுஎனக்குத்தெரியவில்லை…அவர்கள்உயர்த்தப்போகிறார்கள்அவர்கள்உயர்த்தப்போகிறார்கள்நாங்கள்அதைநிறுத்தமுடியும்ஆனால்அதுநன்றாகஇருக்கும்இடத்தில்நாங்கள்இருக்கிறோம்என்றுநான்நம்புகிறேன்இடைநிறுத்தப்பட்டுஅடுத்தமூன்றுமுதல்ஆறுமாதங்களில்இதுஎப்படிஇருக்கும்என்றுபார்க்கவும்”[theFed[thinkingaboutthat…they’regonnaraisethey’regonnaraisewecanstopthatButIdobelievewe’reatapointwhereit’sprobablygoodtopauseandseehowthisplaysoutoverthenextthreetosixmonths”

Top consumers are starting to become more cautious, with evidence of a slowdown in “discretionary big-ticket items” that buy more than $100.

The slowdown in consumer spending is seen in how much product is moving through the national supply chain, according to CFOs, with softening demand and the free fall in housing and all goods going into housing “really slowing down,” another CFO said. “We’ve been looking at it for two months now.”

“Beyond inflation and unemployment, there are many other things like industrial production, housing, where there are already signs that the economy is moving,” said a CFO.

“There’s a message of caution, I’ve heard that it might be time to pause, really watch. Otherwise there’s going to be an abrupt halt for a while,” said another CFO.

The Fed is fixated on the level of employment, and decided early in this deflationary fight that if it was going to break the tail of inflation, it would have to “break the economy,” and create unemployment and labor market displacement. With the labor market tight, and layoffs in tech not representative of the economy as a whole, CFOs said the central bank should be looking ahead at this point and paying more attention to how quickly the job market can tilt. “I think there’s a backlash … and I think they have to be careful not to go too far here,” another CFO said.

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“It’s obvious that everyone wants the Fed to stop raising rates,” said another CFO. “I don’t think that’s going to happen primarily because Chairman Powell has said that the No. 1 thing to do is fight inflation, and we as a society and as a government and as a Congress, basically handed over to the Fed the responsibility of managing inflation.”

Manufacturing lags have doubled in the past year and a half, according to CFOs, and the central bank could address the impact on inflation by raising rates, “basically killing demand,” one CFO said. “So we’re basically locked in. My prediction is that by the end of the year, the Fed funds rate will be 6%. We’ll be heading into recession in Q4. And I don’t think they are. They’ll stay low until at least the end of 2024,” the CFO said.

As traders bet on rate cuts before the end of the year, a CNBC Fed survey showed economists and money managers are confident the central bank will keep rates high for eight months.

“We’re going in the wrong direction because we have only one tool to fight inflation,” said the CFO, who predicts a slowdown in Q4.

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