Seven large companies filed for Chapter 11 bankruptcy protection between May 13 and May 15, 2023—the largest number of filings on record during a 48-hour period since at least 2008, according to Bloomberg. An article published by the media outlet suggests that one factor contributing to this rise in bankruptcies is high interest rates, which are making it increasingly difficult for companies to refinance. Yet even higher interest rates may be on the way.
The Federal Reserve has raised interest rates to high levels.
Since March 2022, the Federal Reserve’s Federal Open Market Committee (FOMC) has enacted 14 consecutive interest rate hikes. These policy changes have raised the borrowing rate to a range of 5–5.25%—from near zero.
Federal Reserve officials have given mixed signals about the future direction of interest rates, but they have indicated that more rate hikes could be on the way. On May 22, 2023, St. Louis Federal Reserve President James Bullard stated his support for two more interest rate hikes by the end of 2023. The same day, Minneapolis Federal Reserve President Neel Kashkari stated that there could be more interest rate hikes after a pause in June. Both Bullard and Kashkari are members of the FOMC.
Some analysts say high interest rates may have already contributed to bankruptcies and other types of financial volatility.
High interest rates have led to a debt crunch that has bankrupted multiple companies, according to a May 15, 2023, article published by Bloomberg. The article states that higher credit levels have led to difficulties in refinancing and debt management for multi-billion-dollar companies including VICE Media, Monitronics, and Envision Healthcare.
The recent turmoil among regional banks, which included several closures, has also been blamed, in part, on high interest rates. The constant raising of interest rates made Treasurys purchased earlier in the cycle nearly impossible to liquidate without incurring major losses. Banks with too much of their assets in Treasurys were not able to sell, resulting in a lack of the liquid cash necessary to complete depositor withdrawals.
Additional market volatility may be on the way.
A recent research paper from a group of leading economists, including three Federal Reserve officials, concludes that Federal Reserve policy will likely lead to a recession. The paper states, “There is no post-1950 precedent for a sizable…disinflation that does not entail substantial economic sacrifice or recession.”
Nobel Prize–winning economist Paul Krugman has said that high interest rates may lead to economic shocks similar to those caused by the recent banking panic. In a New York Times editorial published on May 18, 2023, Krugman says, “The tools we normally use to control inflation are blunt and imprecise, creating a high probability that we’ll get it wrong one way or another.”
As interest rates remain high, additional volatility and market uncertainty may impact economic growth.
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