The US economy is resilient, but experts are still concerned about the possibility of a recession. In April, there was a surge in corporate bankruptcies, the highest in a year, according to S&P Global. This increase is partly due to the diminishing expectations of an interest rate cut, which caused struggling businesses to lose confidence.
Inflation in April coincided with higher yields on junk-rated bonds. This rise in bankruptcies can be attributed to a lack of faith in a quick adjustment of interest rates. According to S&P Global, there were 66 corporate bankruptcies in April, an 88% increase from January. The anticipation of a Fed rate cut has been replaced by the reality that it hasn’t happened yet despite hopes. The expectation of easing monetary policy has been a lifeline for companies with weak finances, and without a rate cut, some have had no choice but to file for bankruptcy.
The three sectors with the most bankruptcies in April were consumer discretionary, healthcare, and industrials. While concerns about stagflation have decreased since April, the Federal Reserve remains cautious about reducing interest rates due to persistent inflation. Analysts have warned that sticking with current monetary policy could lead to negative consequences for the economy. Without a change in interest rates, the risk of economic instability increases according to Frances Donald, chief economist at Manulife Investment Management.