The chart below shows that Fed hikes have not had the desired effects on firms. You would normally expect that when interest rates go up, corporates see an increase in debt-servicing costs.
But because of locked-in low interest rates combined with strong corporate earnings, net interest payments as a share of operating surplus have been going down, see chart below.
The bottom line is that not only have Fed hikes had a limited negative impact on consumers because of locked-in low mortgage rates. Fed hikes have also had a very small impact on corporates because of locked-in low interest rates and rising earnings.
In short, the transmission mechanism of monetary policy has been much weaker than the economics textbook would have predicted. This is because consumers and firms locked in low interest rates during the pandemic.
As a result, the economy never slowed down when the Fed raised rates. And now the Fed is cutting, boosting asset prices and growth in consumer spending and capex spending further.
To be sure, firms with weak earnings, weak revenue, and weak cash flows have been hit by Fed hikes. But the aggregate outcome seen in the chart below shows that from a macro perspective the negative effects of Fed hikes on corporates have been small.
Source: Federal Reserve Board, Haver Analytics, Apollo Chief Economist
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