Despite the strength of the US economy, experts are warning that a recession could still occur. The number of corporate bankruptcies in April reached its highest level in a year, according to S&P Global. This increase can be attributed to the fading hopes of an interest rate cut, which led struggling businesses to give up. Inflationary data in April also coincided with a rise in yields for junk-rated bonds.
The rise in corporate bankruptcies has come amid doubts about the Federal Reserve’s willingness to lower interest rates. Since July 2021, interest rates have been stable between 5.25% and 5.50%. Many businesses were hoping for a rate cut to ease their financial burdens, but hopes for an early rate cut have been diminished by strong economic data and inflation rates. Some analysts have pushed back expectations for a rate cut as far as December due to these factors.
Despite a brief scare of stagflation in April, the focus now remains on lowering inflation rates before considering an interest rate cut. Sectors such as consumer discretionary, healthcare, and industrials were hit hardest by bankruptcies in the same month. However, economists like Frances Donald from Manulife Investment Management warn that maintaining unchanged monetary policy for too long could lead to negative consequences for the economy
