In an unsettling revelation, two Federal Reserve economists have recently issued a comprehensive report that portends a potentially worrisome state of the American economy, noting an unprecedented level of financial distress amongst non-financial firms.

According to the research note, since March 2022, the tightening of the U.S. monetary policy has led to a striking escalation in the number of these firms grappling with financial strain. A remarkable 37% of firms are now said to be under financial stress, a figure that surpasses those seen in most previous instances of policy tightening since the 1970s, according to the report.

The economists posit that this bleak situation may herald significant impacts due to the Federal Reserve’s stark hike in interest rates. They suggest that the true ramification of this policy shift might be only now starting to emerge and could be considerable.

The complexity of predicting these effects is acknowledged in the report, yet initial calculations seem to hint at a possibly substantial impact on investment and employment, considering the high percentage of currently distressed firms compared to previous tightening cycles.

The report adds:

To start with, total investment in our sample of publicly-listed firms accounts for about 60% of aggregate U.S. investment and aggregate investment is one of the most responsive components of GDP to monetary shocks.

Employment within these firms constitutes about one-third of total U.S. non-government employment, according to the report, which adds that given these figures and the current 37% distress rate, estimates suggest “that the recent policy tightening is likely to have effects on investment, employment, and aggregate activity that are stronger than in most tightening episodes.”

The researchers forecast that the reverberations of these policy changes will likely peak between one and two years post-shock, indicating that 2023 and 2024 might see the most significant effects.

An alarming possibility raised by the Federal Reserve economists is that the tightening policies could nudge these financially distressed firms closer to the brink of default, which would lead to a surge in bankruptcies and layoffs.

The economists caution that their analysis may undervalue the real impact on employment as policy-induced bankruptcies could cause layoffs not accounted for in their data.

As CryptoGlobe reported, in an assessment of the world economy HSBC Asset Management, the investment arm of the banking behemoth warned that the United States is set to face economic headwinds in the latter part of this year, in what could potentially usher in a global recession.

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