Why is the economy still so strong, and why are Fed hikes not having a bigger negative effect on the economy?
There are three reasons:
1. High savings in the household sector.
2. During the pandemic, IG and HY corporates extended the maturity of their loans, making them less vulnerable to higher rates.
3. The service sector is less sensitive to interest rates and continues to experience a structural tailwind after Covid with strong demand for air travel, hotels, restaurants, etc.
The bottom line is that the weaker transmission mechanism of monetary policy will keep the costs of capital higher for longer because that is what is needed for the Fed to get inflation down from currently 5% to the Fed’s 2% inflation target.
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