Credit Strength Is Baffling Fed Watchers Ahead of Rate Decision

To have a shot at taming inflation, the Federal Reserve is intent on tightening financial conditions across the economy. But they haven’t made much of a dent in corporate America yet.

The extra yield investors demand for risk in the US investment-grade and high-yield bond markets has remained below their 20-year averages and well under levels seen during historical times of stress in the economy. Borrowing remains robust, one measure of credit quality is improving at a record rate and recent earnings reports for some of the nation’s most indebted companies have come in stronger than expected.

How that’s all happening after the Fed increased its benchmark rate at the fastest pace in four decades — and to the highest level in 22 years — is nothing short of remarkable. And it once again raises the question if policymakers have hiked interest rates to what they deem a “sufficiently restrictive” level, or held them there for long enough.

“If you had told me two years ago that the Fed would hike by this much in a short time, I would have said that they would leave dead bodies littered across the corporate credit landscape,” said former Fed Governor Jeremy Stein, who’s now a professor at Harvard University. “I really don’t have any good story to explain why things have instead been so resilient.”

Credit Spreads Are Still Very Tight