Fed Faces Dilemma as Corporate Profits Defy Higher Interest Rates

The US Federal Reserve's (Fed) ability to slow down the economy through interest rate hikes is being called into question by some economists. Historically, higher rates have had a direct impact on corporate profit margins, but this may not be the case in today's economy.

According to SocGen's Albert Edwards, 'corporate net interest payments remain low,' despite rising mortgage rates. This means that companies are not feeling the pinch of higher interest rates, allowing them to continue profiting even with increased borrowing costs.

In fact, corporate interest payments as a share of profits have hit a new low in Q2 of this year. Edwards has plotted the corporate interest payments metric against the real funds rate, and the two series are now completely detached.

This raises concerns about the Fed's willingness to tighten monetary policy further. The Fed may need to raise interest rates higher than expected to slow down the economy, which could have unintended consequences for households and corporations that are currently insulated from the effects of rising rates.