As global central bankers gather in Wyoming for an annual Federal Reserve symposium, Meghan Robson at BNP Paribas anticipates the event will confirm her expectations that US interest rates will remain elevated well into 2024.
(Bloomberg) — As global central bankers gather in Wyoming for an annual Federal Reserve symposium, Meghan Robson at BNP Paribas anticipates the event will confirm her expectations that US interest rates will remain elevated well into 2024.
“We actually have an assumption that rates will stay higher for longer, so heading into Jackson Hole, we’re not expecting a major policy shift out of the Fed,” Robson, the firm’s head of US credit strategy, said Thursday in an interview with Bloomberg Television’s Alix Steel.
Fed Chair Jerome Powell will deliver a closely watched address on Friday at the gathering. In July, the central bank lifted rates to a range of 5.25% to 5.5%, the highest level in 22 years. His speech comes amid debate that the so-called neutral interest rate — at which policy is neither stimulating the economy nor slowing it — may be higher than before the pandemic.
“We do think they could discuss a higher neutral rate,” Robson said. “If they do so, economists expect that would be implemented by holding rates higher for longer here, so well into 2024.”
As investors prepare to parse everything out of the Fed retreat for hints on the path of interest rates, Robson says credit sentiment has been “generally positive,” citing investor positioning.
“Our BNP credit-positioning indicator is now at the longest level since pre-Covid,” she said. “As growth has surprised to the upside, we have seen investors add to risk, and that appetite has increased, so I think there is cautious optimism heading into the symposium.”
Robson said inflation will be “stickier” than anticipated. However, she expects “the Fed will eventually reach their goal — it’s just going to take a lot longer than people have baked in.” That means inflation will start to come down “well into 2024,” she said.
Credit-quality deterioration has emerged in the last few months, particularly in the most rate-sensitive parts of the market, Robson said, citing leveraged-loan defaults that have gradually climbed. Such weakening could build if the higher-for-longer rate scenario plays out, the analyst said.
“On a high-frequency basis, the three-month default rate for loans is annualizing close to 5%, signaling we are heading in the direction of a default cycle,” Robson said. “For the rest of the market, we are getting to the point where now interest expense is above earnings and at a level where as maturities come due it will start to impact areas outside of that most floating-rate sensitive areas,” she said.
“The lower-quality part of the market has seen earnings growth slow at a faster pace than higher quality, and as that continues, and we lose economic momentum, we would expect decompression across credit valuations,” Robson said.
As the elections cycle comes into view, Robson anticipates that the federal government’s deficit spending will take center stage in political debates.
“It will be a major factor in our GDP forecast,” she said. “Typically, in a political season, you’ll see discussion around regulation of energy, financials and tax policy, so those are all risks that we’ll be watching in the year ahead.”
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