One economist still feels a recession is looming — because corporate borrowing costs could shoot up, thanks to rising interest rates

Interest rates have been rising since March 2022 when the Fed started hiking them relentlessly.

jayk7/Getty Images

• Fidelity International's Salman Ahmed is predicting a recession on the back of high interest rates, per Bloomberg.
• That's because the corporate debt that expires in the next few years will face higher refinancing costs.
• About a quarter of US investment-grade debt is maturing between 2023 and 2025, per Fidelity.

The US economy may appear strong, but the Federal Reserve's relentless rate hikes may bring about a recession as they work through the system, according to one prominent economist.

The downturn could come amid high levels of corporate debt that's becoming due in the next few years — as companies that borrowed cheaply in the past would now have to pay higher interest rates when they refinance, according to Salman Ahmed, Fidelity International's global head of macro and strategic asset allocation.

"The endpoint of the cycle is recession because the transmission channel will kick in," Ahmed told Bloomberg in an interview on Friday. "If the Fed doesn't back off at some point, everybody has to pay these higher real rates."

About a quarter of US investment-grade debt is maturing from 2023 to 2025, per Fidelity. The companies had borrowed cheaply before this current rate hike cycle, but they could face far higher refinancing costs after maturity due to rising interest rates. Corporate debt is typically refinanced rather than paid off.

The increased cost of borrowing due to higher interest rates means companies may not be able to invest in growth. Consumer spending also typically falls when interest rates rise. This slowing growth could lead to a recession. 

This relationship is why the Fed slashed interest rates during the Great Recession of 2007 to 2009 to boost lending and spending in the economy. By the end of 2008, its benchmark interest rate — the Fed Funds Rate was close to 0%.

The US central bank started raising the rate at the end of 2015 to normalize interest rates but had to cut it back down close to zero when the COVID-19 pandemic ravaged the economy.

The Fed has been hiking interest rates relentlessly since March 2022 to combat red-hot inflation as the pandemic receded. The Fed's target federal funds rate is now in the 5.25% to 5.50% range. The Fed is scheduled to hold its next interest-rate meeting on September 19 and 20.

Fidelity's Ahmed — whose team is predicting there's a 60% chance of a US recession — told Bloomberg the US economy's resilience so far amid a high-interest rate environment is because the Fed's monetary policy changes are still working their way through the economy. 

"Borrowers are not feeling the full pressure of the interest rate because they are sitting on locked rates, which is not a permanent phenomenon," he told the media outlet. "A company which financed itself at 2%, 3%, 4% is going to be financing at 10%, 11%, 12% now. That's a huge shock."

And Ahmed isn't the only voice calling out the dangers of the Fed's rising rate hikes.

Top economist David Rosenberg said in a podcast on Thursday that the US economy is heading toward a recession in early 2024 based on an assessment of the Fed's steep rate hikes, softer consumer spending, and a deterioration of credit.

Fidelity International did not immediately respond to a request for comment sent by Insider outside regular business hours.

Read the original article on Business Insider

from Business Insider https://ift.tt/Sp1OUnd