The dangers of the current Fed pivot: Why the euphoria on the stock markets is deceptive

The dangers of the current Fed pivot: Why the euphoria on the stock markets is deceptive

According to a report from de.investing.com, there is currently a celebratory mood on the stock markets due to the Fed's promised change in interest rate policy. A Goldilocks scenario is even assumed: declining inflation, a soft landing of the economy and significantly falling interest rates in 2024. But financial experts warn about the dangers beneath the surface that the market is currently ignoring. High borrowing costs are met with increasing amounts of debt coming due, which could result in defaults and losses for banks and lenders. The impact of rising interest rates on the real economy could be clearly felt in the coming years. This could lead to a massive increase in borrowing costs for high-risk companies and further complicate access to credit for consumers. 2024 is forecast to be the weakest non-crisis year since the beginning of the century.

The central banks' interest rate policy will therefore have a significant impact on the credit markets and the real economy. An analysis by economists at Citigroup estimates that worsening credit availability could reduce real growth in the U.S. and euro area by about 1% to 2% by the end of next year. Companies with a CCC rating will be particularly affected by a massive increase in credit costs, which will also affect their potential customer decline. Banks face a huge mountain of debt that will mature in the coming years, leading to delinquencies and losses.

Tighter lending in the euro area and falling liquidity could also lead to systemic problems, which Moody's Investors Service sees as a warning sign. The central banks' restrictive monetary policy requires close observation in order to correctly assess the impact on the financial sector. With a view to the USA and the euro area, it will become clear to what extent rising interest rates and the associated effects will influence real growth and the credit markets.