The U.S. economy is headed for a “shakeout” as business debts come due and companies are forced to refinance at significantly higher interest rates, according to Atlanta Federal Reserve President Raphael Bostic.
“We have a lot of existing debt out there that is at very low prices,” Bostic said at the South African Reserve Bank’s Biennial Research Conference, held Aug. 31 and Sept. 1 in Cape Town. “When that comes due, they’re not going to be able to refinance into comparable prices. There’s going to be an adjustment that needs to happen on that. So I actually think there’s a shaking out that’s about to happen at all levels.”
Bostic is one of the more dovish U.S. policymakers, Bloomberg reported. He has urged patience and caution among policymakers, laying out a case against any more U.S. interest rate hikes that would needlessly hurt jobs and livelihoods. Monetary policy is already tight enough to bring inflation back down to 2 percent in a reasonable period, Bostic said.
“I feel policy is appropriately restrictive,” he said. “We should be cautious and patient and let the restrictive policy continue to influence the economy, lest we risk tightening too much and inflicting unnecessary economic pain.”
The Fed has imposed about 5.25 percentage points of interest-rate hikes — 11 rate hikes in 17 months — since March 2022 to try and slow down borrowing, spending and and inflation. These have already helped slow inflation, Bostic said in South Africa. Consumer price inflation has dropped from a 9 percent peak in the summer of 2013 to 3.2 percent in July 2023.
Bostic doesn’t think another hike is needed, AP reported. However, he favors keeping the benchmark rate at its current level well into 2024.
“So many bankers in our country have never lived in a rising interest rate environment or a higher interest rate environment.” Bostic said. “And so there’s a lot of learning that needs to take place.”
However, Bostic said he still sees “still”a fair amount of momentum in the economy.”
“And when I talk to bankers and others, they will tell me that a lot of their customers still have savings balances that are higher than they were pre-pandemic,” Bostic said in an AP interview in late August. “And so that is going to allow them to be more resilient than we might expect otherwise. I talk to business leaders, what they tell me is the slowdown is here and it’s showing up in specific ways. The degree to which the slowdown is occurring is broadening. And there are increasing parts of the economy where people are telling me they’re starting to see more and more slowdown. But things are still quite robust overall.”
The amount of interest on government debt is also going up considerably, and this will create pressure, Bostic added.
Meanwhile, Forbes reported on Sept. 7, 2023, that the average interest rate on a 20-year fixed refinance mortgage is 7.63 percent. One week ago, the 20-year fixed-rate mortgage was at 7.45 percent.