Fed economists say a historic 37% of US companies are in big trouble - and warn that could worsen the fallout from fighting inflation


Zahra Tayeb
Tue, June 27, 2023 

Fed Chair Jerome Powell.Getty Images

Fed economists just rang the alarm on the historic percentage of distressed US companies today.


Around 37% of firms are in major trouble, which could worsen the fallout from the Fed's rate hikes.


Investment, employment, and economic activity could all take a significant hit, researchers said.

Federal Reserve economists just warned a historic surge in the percentage of distressed American companies could worsen the fallout from the US central bank's fight against inflation.

"The share of nonfinancial firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s," Ander Perez-Orive and Yannick Timmer said in a recent note.

The upshot is that the Fed's hikes to interest rates — intended to curb the pace of price increases by raising borrowing costs — threaten to have a magnified impact on business investment, employment, and economic activity.

That's likely because debt-ridden companies will balk at spending money on new equipment or facilities, hiring more people, and ramping up production.

The percentage of troubled US firms currently stands at around 37%, the pair of researchers said. That could lead to the Fed's rate hikes having some of the most devastating impacts of any of its tightening cycles over the past four decades, they noted. The full extent of the damage should become clearer over the next 18 months, they added.

The Fed has already hiked interest rates from nearly zero to north of 5% since last spring in an effort to curb inflation, which spiked to a 40-year high of more than 9% last year. After 10 consecutive rate hikes, the central bank has helped to bring inflation down to about 4%.

Fed Chair Jerome Powell and his colleagues skipped a rate hike this month, against a backdrop of cooling inflation and emerging cracks in sectors such as banking and commercial real estate. However, they've signaled they could raise rates a couple more times in the months ahead.

The prospect of further hikes has some investors worried that the Fed is going overboard in its fight against inflation, and might tip the economy into recession unnecessarily.