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Guckes: Rising interest rates further slowing investment spending

Michael Guckes
Guckes: Rising interest rates further slowing investment spending

Much has been made of the efforts by the U.S. Federal Reserve Bank to raise interest rates in order to cool down price inflation without also sending the overall economy into a recession.

Achieving this feat will be a considerable task as it requires the right balance of slowing down the various elements of total economic activity, as measured by Gross Domestic Product, without sending it into reverse.

Of the four traditionally recognized components (consumption, investment, government, and net exports), investment spending is arguably one of the more rate-sensitive components of GDP due to the large amount of debt financing which underpins much investment spending.

As interest rates increase, the cost of borrowing money used for making investment purchases increases, driving up the cost of such projects and driving down their return.

The Federal Reserve’s transition from a decade of easy monetary policy starting after the Great Recession toward tighter policy in recent months is evident by the net flows of bond debt held by corporations outside the financial sector.

Corporate bond growth which has historically grown by 5% on average since at least the late 1990s was recorded at 0.5%, or one-tenth of historical growth levels according to Q2 2022 data provided by the Bureau of Economic Analysis.

Read more about the implications here:

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