The Federal Reserve’s decision to raise interest rates and pare back its balance sheet was perhaps more emphatic on the latter point. However, that still doesn’t change the larger economic picture.
The overall level of personal and corporate borrowing — compared to earnings — remains reasonable. Existing Treasury bonds won’t be affected by the Fed’s increase, as long as the Reserve reinvests at a slower rate rather than selling off assets. They can increase short-term interest rates without inverting the yield curve for Treasuries.
Bottom line, bonds will likely disappoint for the near future, but the stock market should remain stable enough.
Certain Corporations Will Be More Indebted
There’s seemingly going to be more cause for concern for individual firms that have excessively borrowed in relation to their earnings. They will have a harder time servicing their debt in the near future. With the Fed decision raising the costs of taking on additional debt, it’s important to take a close look and see which companies may find themselves over-leveraged.
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