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

  • The Federal Reserve is expected to raise interest rates by a quarter of a percentage point on Wednesday.
  • While this may be the final rate hike by the Fed in the current monetary policy cycle, it may be too much, according to financial directors from across the economy who serve on the CNBC CFO.
  • They tell CNBC that the consumer is weakening even on the higher income end and payment delinquencies are sharply higher, there is a greater risk of a sharp rise in unemployment, and economic indicators that the Fed may not be focused enough on defending the pause in the fight against inflation.

Federal Reserve Chairman Jerome H. Powell testifying before the US Senate Banking, Housing, and Urban Affairs Committee hearing on the “Semi-Annual Monetary Policy Report to Congress” on Capitol Hill in Washington, US, on March 7, 2023.

Kevin Lamarck | Reuters

The job market remains tight, but employment is cooling rapidly and job losses are increasing. The yield curve has been flattening a recession, for quite some time already, and the Leading Economic Indicators Index is experiencing one of the worst recessions on record. But the Fed has a one-track mind for now: inflation remains the only focus, and after last week’s PCE price index report showed prices rising again, the Fed will raise interest rates on Wednesday. That’s what the market expects – there was a unanimous belief in this week’s CNBC Fed poll of economists and money managers that a quarter of a percentage point is coming.

But inside the big companies, executives say they see signs of mounting trouble for the economy, and with another rate hike imminent, it may be time for the Fed to pause. That was the tone of a call that CNBC’s CFO Board held Tuesday with chief financial officers from several sectors of the economy. The call, conducted in the background to allow CFOs to speak freely, found CFOs at big companies increasingly concerned about consumer health and the Fed’s narrow focus on fighting inflation as conditions worsened.

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One concern CFOs have expressed is that the higher end of the consumer market was masking deeper problems in the economy, with companies tracking the rise in credit delinquencies, and that is now starting to catch on. Pressures in consumer lending, which has risen sharply since May last year, have been concentrated in low-FICO sectors, but a year later, credit weakness is showing up in the core sector, among consumers with higher credit scores as well. Across the FICO bands, there has been a recent 40% to 60% increase in higher levels of delay in installment lending, according to data shared on the CFO call.

As the more prudent lenders operating in the prime space have aggressively backtracked on originations, from credit unions to big players in consumer financial services, non-prime lenders are getting higher FICO credit. While that’s good for them, it also means “we’re definitely heading for a slowdown,” said one CFO. “They’re trying to fight a problem, but there’s evidence around the United States that says the economy is slowing down. Give it time for things to take hold. You just don’t want to keep going in that environment.”

Some prominent voices among former Fed officials have been sending a similar message, including former Boston Fed President Eric Rosengren and former Dallas Fed President Robert Kaplan, who recently said it was time to stop.

Some of the problems CFOs mentioned with the consumer were well known and well tracked for a while already, including consumers backing away from discretionary spending to non-discretionary essentials, and draining stimulus savings of already low-income Americans. But even as inflation in groceries, utilities, and rents eases, and even as the unemployment rate continues to decline, recent data on hours worked shows a decline and that means smaller wage pressures increase. “It’s concerning,” said one CFO.

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“I worry about the damage it’s doing,” said another chief financial officer of the Fed’s continued rate hike. “When unemployment comes along, it will go up and down the risk spectrum,” the CFO said, referring to all consumer groups based on FICO scores.

While CFOs said they understand the conundrum the Fed faces because inflation is stubborn, they are equally concerned that the data the Fed is focusing on is “a little bit behind,” one CFO put it. An example is energy prices, which have fallen. “I don’t know if they[the Fed]are thinking about it they’ll hike, they’ll hike, we can stop that but I think we’re at a point where it might be good to pause and see how that plays out over the next three to six months”[theFed[thinkingaboutthat…they’regonnaraisethey’regonnaraisewecanstopthatButIdobelievewe’reatapointwhereit’sprobablygoodtopauseandseehowthisplaysoutoverthenextthreetosixmonths”[مجلسالاحتياطيالفيدرالي[يفكرونفيذلكسيرفعون،سيرفعون،يمكنناإيقافذلكلكننيأعتقدأننافيمرحلةربمايكونفيهاالأمرجيدًاللتوقفمؤقتًاومعرفةكيفيةحدوثذلكخلالالأشهرالثلاثةإلىالستةالمقبلة”[theFed[thinkingaboutthat…they’regonnaraisethey’regonnaraisewecanstopthatButIdobelievewe’reatapointwhereit’sprobablygoodtopauseandseehowthisplaysoutoverthenextthreetosixmonths”

The affluent consumer has also begun to become more cautious, with evidence of a slowdown in “discretionary big ticket items,” as CFOs put it, on purchases over $100.

The slowdown in the consumer is seen in how much product is moved through the national supply chain, according to the CFOs, as the decline in demand and the free fall in housing and all the goods that go into housing are slowing, “really,” said another CFO. “We saw that two months ago.”

“Other than just inflation and unemployment, there are a number of other things, whether it’s industrial production, whether it’s housing, these signs are already there that the economy has moved on,” said one CFO.

Another CFO said, “There’s a message of caution I think I’ve heard that this might be a good time to stop, and really watch. Otherwise there’s going to be some sudden stop.”

The Fed is focused on the level of employment, and it decided early in this fight against inflation that if it is going to break the back of inflation, it must “break the economy”, creating a certain level of unemployment, and labor market turmoil. While the job market remains tight, and layoffs in technology are not representative of the economy as a whole, CFOs said the central bank should look ahead to this point and focus more on how quickly the job market can tilt. Another CFO said, “I think there’s a backlog to this… I think they have to be careful not to go too far here.”

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Another CFO said, “Obviously, everyone wishes the Fed would stop raising interest rates.” “I don’t think that’s going to happen in the first place because Chairman Powell said fighting inflation is the number one thing and we as a society, government and Congress, have basically handed over the responsibility for managing inflation to the Federal Reserve.”

The manufacturing backlog has doubled over the past year and a half, according to the CFOs, and the Fed can resolve the impact it has had on inflation by continuing to raise rates, “basically destroying demand,” said one CFO. “So we’re basically forced into the situation. My prediction is by the end of this year, the fed funds rate will be at 6%. We’re going into recession in the fourth quarter. And I don’t think they’re going to cut rates, at least until the end of 2024,” the director said. financial”.

As traders bet on interest rate cuts before the end of the year, the CNBC Fed poll shows a belief of economists and money managers that the Fed will keep interest rates higher for eight months.

“We’re heading in the wrong direction, because we only have one tool to use to try to combat inflation,” said the CFO, who forecasts a recession in the fourth quarter.

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