The Federal Reserve’s Interest Rate Rise Will Increase Default Rates Significantly For Most Sectors

Market participants have their eyes on the Federal Open Markets Committee this week to see if FOMC members vote to raise the federal funds rates again. The FOMC has raised rates nine times since March 17, 2022. Because inflation is nowhere near the Federal Reserve’s 2% target rate and due to JPMorgan’s recent acquisition of First Republic Bank
FRC
on Monday, I believe that the Federal Reserve will raise rates on Wednesday.

The FOMC is likely to raise rates twenty-five basis points to a range of 5.0%-5.25%; this would put rates at about a 16-year high. This level of rate rises has been an unpleasant surprise for many consumers and unfortunately, even bank risk managers, who have never experienced the fact that interest rates do go up to curb inflationary pressures. The fact that three U.S. regional banks have failed in less than two months, primarily due to risk managers’ and executives’ inability to measure how interest rate risk can make banks illiquid, puts into question how much longer the Federal Reserve can keep raising rates after this week’s FOMC meeting.