The Federal Reserve stands ready to accelerate interest-rate hikes to combat inflation, central bank Chair
Jerome Powell
said in congressional testimony the past two days. Some finance chiefs who are already pushing their companies to do more with less amid rising costs said they are closely monitoring the impact of what comes next.
Mr. Powell’s comments, delivered during semiannual hearings before Senate and House panels, open up the possibility that a larger half-point interest rate increase may be in store when Fed officials meet for their two-day policy meeting March 21-22. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” he told the Senate Banking Committee on Tuesday.
Federal Reserve Chair Jerome H. Powell testifies before a House Financial Services hearing on Capitol Hill in Washington on March 8.
Photo:
KEVIN LAMARQUE/REUTERS
The Fed chair on Wednesday said the central bank is keeping its options open about how much to raise rates at its next meeting and stressed that no decision has been made. Government reports on hiring and inflation in February, which are due out over the next week, will strongly influence the Fed’s decision, he said.
Fed officials last month slowed their pace of rate increases, raising the benchmark federal-funds rate by a quarter point, to a range between 4.5% and 4.75%. That followed increases of a half point in December and 0.75 point in several prior meetings. Most Fed officials in December thought they’d raise the rate this year to between 5% and 5.5% and hold it there into next year; they will submit new projections at their meeting this month.
‘We will be going into recession’
For some finance chiefs, the possibility that the Fed will raise interest rates by a larger half-percentage-point later this month comes as little surprise given that consumer spending remains strong and hiring continues to be robust.
“Spending is still happening, inflation is still creeping up or it’s not getting anywhere near the downward slope they need and so that’s their only tool,” said
Heath Byrd,
chief financial officer at auto retailer
Sonic Automotive Inc.
Mr. Byrd predicts the rate could increase to as high as 6%.
Sonalee Parekh,
finance chief at cloud-based communications solutions provider
RingCentral Inc.,
said she was expecting rate increases but that she was surprised by Mr. Powell’s indication that the pace could accelerate. The potential for larger rate increases raises the question of whether the U.S. will see a soft landing or a recession, she said. Ms. Parekh said she was optimistic earlier in the year that the former would be the reality.
“But based on the recent inflation data and the Fed’s response, the response that Chairman Powell is likely to take, it feels more imminent now that we will be going into recession,” she said. “And the question always is, ‘how deep and for how long.’”
Impact on financing and spending
Surprised or not, finance chiefs are girding for the impact of higher interest rates for a longer period in a variety of ways.
Financing decisions, first and foremost, will see the most direct impact from higher rates. “Gone are the days of 0% convertible debt or low-cost bank financing,” Ms. Parekh said.
RingCentral in February announced a $600 million credit facility, including a $400 million term loan and a $200 million revolving credit line, with both fixed and floating rates, though Ms. Parekh declined to provide the breakdown between the two. Floating-rate notes can create added uncertainty and expense for finance chiefs if the Fed accelerates its rate increases in coming meetings.
What’s more, the economic uncertainty that comes with the higher-rate environment will lead to greater scrutiny of how a company spends its capital, Ms. Parekh said. That can include additional layers of approval, holding back spending as rates move higher and a push to drive down costs, she added.
Heath Byrd, chief financial officer at Sonic Automotive Inc.
Photo:
Seth Laubinger/Ruby Media
“Everyone is very, very focused on profitability right now,” she said. “Investors in the markets are demanding profitability, and higher borrowing costs makes that profitability target even harder to achieve.”
At Sonic Automotive, Mr. Byrd said higher rates would have an impact on the company’s expenses related to what is called variable floor plan financing of wholesale vehicle purchases. Sonic essentially finances the vehicles when purchasing them from a manufacturer, he said, and that is done at a variable rate. This means the cost of financing these new vehicles hits expenses, according to Mr. Byrd.
Cost cutting is one strategic response to economic uncertainty, Mr. Byrd said. The company has cut around $90 million in costs since the pandemic, the CFO said, though he added that with current projections for the business, further cuts are unlikely. “But we always have that option.”
Watching consumer habits
Americans have been spending more at restaurants and hotels and shelling out for goods such as refrigerators and cars as they see price relief on gas and a boost in January from bigger Social Security checks. But this may change as interest rates rise, finance chiefs said.
Consumers already are looking closely at their monthly car payment amounts, which increase as rates go up, said Sonic Automotive’s Mr. Byrd. They are also more often paying cash for vehicles to avoid the already higher costs of financing, which can reduce Sonic Automotive’s gross profit related to indirect financing. The company provides indirect financing, meaning financing through a third party, for around 80% of new vehicles and 70% of used vehicles sold, the CFO said, adding that higher interest rates may eat into this part of the company’s business as consumers become more selective about their financing rates. “It’s not material yet, but it is a trend we’re seeing where there’s more cash deals than there have been,” Mr. Byrd said.
Mr. Byrd said he expects to potentially see at least some change in consumer demand in the second and third quarters of this year as rates continue to increase. “Every single interest rate has a, I’d say, at least one- to two-month lag before we really see the consumer behavior react to it,” he said.
On top of that, the CFO said, consumer savings accumulated during the pandemic will at some point start to diminish. “That’s going to be that tipping point where I think you’re going to have an affordability issue across the board, and that’s exactly what the Fed wants to happen, that’s what they need to have happen.”
Software provider
Autodesk Inc.
is also closely watching how the Fed’s announcement will affect its customers, Chief Financial Officer
Debbie Clifford
said. The rate increases could make it harder for the company’s customers, which are concentrated in the architecture, engineering, construction, manufacturing and media industries, to execute on their projects, she said. For example, Autodesk’s manufacturing customers would likely face higher materials costs from the possible hikes, she said.
“It’s just another data point for us to be looking at as we think about this world of rising interest rates and what the potential might be in terms of the impact on our customers,” Ms. Clifford said. Autodesk is otherwise insulated from rate increases because it has minimal capital expenditures and no near-term financing needs, Ms. Clifford said.
For wholesale retailer
Costco Wholesale Corp.
, which is known for selling discounted bulk goods to paying members, pressure on consumers’ spending may in some ways be a benefit, according to Chief Financial Officer
Richard Galanti.
Costco’s markup on goods is in the low teens compared with traditional retailers, where it can be anywhere from 25% to 50% or more, Mr. Galanti said. “Perhaps it creates an opportunity that they’re looking to save more money,” he said of consumers. “Some suggest we do well in both good and bad times because of that.”
—Mark Maurer contributed to this article.
Write to Jennifer Williams-Alvarez at jennifer.williams-alvarez@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
The Federal Reserve stands ready to accelerate interest-rate hikes to combat inflation, central bank Chair
Jerome Powell
said in congressional testimony the past two days. Some finance chiefs who are already pushing their companies to do more with less amid rising costs said they are closely monitoring the impact of what comes next.
Mr. Powell’s comments, delivered during semiannual hearings before Senate and House panels, open up the possibility that a larger half-point interest rate increase may be in store when Fed officials meet for their two-day policy meeting March 21-22. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” he told the Senate Banking Committee on Tuesday.
Federal Reserve Chair Jerome H. Powell testifies before a House Financial Services hearing on Capitol Hill in Washington on March 8.
Photo:
KEVIN LAMARQUE/REUTERS
The Fed chair on Wednesday said the central bank is keeping its options open about how much to raise rates at its next meeting and stressed that no decision has been made. Government reports on hiring and inflation in February, which are due out over the next week, will strongly influence the Fed’s decision, he said.
Fed officials last month slowed their pace of rate increases, raising the benchmark federal-funds rate by a quarter point, to a range between 4.5% and 4.75%. That followed increases of a half point in December and 0.75 point in several prior meetings. Most Fed officials in December thought they’d raise the rate this year to between 5% and 5.5% and hold it there into next year; they will submit new projections at their meeting this month.
‘We will be going into recession’
For some finance chiefs, the possibility that the Fed will raise interest rates by a larger half-percentage-point later this month comes as little surprise given that consumer spending remains strong and hiring continues to be robust.
“Spending is still happening, inflation is still creeping up or it’s not getting anywhere near the downward slope they need and so that’s their only tool,” said
Heath Byrd,
chief financial officer at auto retailer
Sonic Automotive Inc.
Mr. Byrd predicts the rate could increase to as high as 6%.
Sonalee Parekh,
finance chief at cloud-based communications solutions provider
RingCentral Inc.,
said she was expecting rate increases but that she was surprised by Mr. Powell’s indication that the pace could accelerate. The potential for larger rate increases raises the question of whether the U.S. will see a soft landing or a recession, she said. Ms. Parekh said she was optimistic earlier in the year that the former would be the reality.
“But based on the recent inflation data and the Fed’s response, the response that Chairman Powell is likely to take, it feels more imminent now that we will be going into recession,” she said. “And the question always is, ‘how deep and for how long.’”
Impact on financing and spending
Surprised or not, finance chiefs are girding for the impact of higher interest rates for a longer period in a variety of ways.
Financing decisions, first and foremost, will see the most direct impact from higher rates. “Gone are the days of 0% convertible debt or low-cost bank financing,” Ms. Parekh said.
RingCentral in February announced a $600 million credit facility, including a $400 million term loan and a $200 million revolving credit line, with both fixed and floating rates, though Ms. Parekh declined to provide the breakdown between the two. Floating-rate notes can create added uncertainty and expense for finance chiefs if the Fed accelerates its rate increases in coming meetings.
What’s more, the economic uncertainty that comes with the higher-rate environment will lead to greater scrutiny of how a company spends its capital, Ms. Parekh said. That can include additional layers of approval, holding back spending as rates move higher and a push to drive down costs, she added.
Heath Byrd, chief financial officer at Sonic Automotive Inc.
Photo:
Seth Laubinger/Ruby Media
“Everyone is very, very focused on profitability right now,” she said. “Investors in the markets are demanding profitability, and higher borrowing costs makes that profitability target even harder to achieve.”
At Sonic Automotive, Mr. Byrd said higher rates would have an impact on the company’s expenses related to what is called variable floor plan financing of wholesale vehicle purchases. Sonic essentially finances the vehicles when purchasing them from a manufacturer, he said, and that is done at a variable rate. This means the cost of financing these new vehicles hits expenses, according to Mr. Byrd.
Cost cutting is one strategic response to economic uncertainty, Mr. Byrd said. The company has cut around $90 million in costs since the pandemic, the CFO said, though he added that with current projections for the business, further cuts are unlikely. “But we always have that option.”
Watching consumer habits
Americans have been spending more at restaurants and hotels and shelling out for goods such as refrigerators and cars as they see price relief on gas and a boost in January from bigger Social Security checks. But this may change as interest rates rise, finance chiefs said.
Consumers already are looking closely at their monthly car payment amounts, which increase as rates go up, said Sonic Automotive’s Mr. Byrd. They are also more often paying cash for vehicles to avoid the already higher costs of financing, which can reduce Sonic Automotive’s gross profit related to indirect financing. The company provides indirect financing, meaning financing through a third party, for around 80% of new vehicles and 70% of used vehicles sold, the CFO said, adding that higher interest rates may eat into this part of the company’s business as consumers become more selective about their financing rates. “It’s not material yet, but it is a trend we’re seeing where there’s more cash deals than there have been,” Mr. Byrd said.
Mr. Byrd said he expects to potentially see at least some change in consumer demand in the second and third quarters of this year as rates continue to increase. “Every single interest rate has a, I’d say, at least one- to two-month lag before we really see the consumer behavior react to it,” he said.
On top of that, the CFO said, consumer savings accumulated during the pandemic will at some point start to diminish. “That’s going to be that tipping point where I think you’re going to have an affordability issue across the board, and that’s exactly what the Fed wants to happen, that’s what they need to have happen.”
Software provider
Autodesk Inc.
is also closely watching how the Fed’s announcement will affect its customers, Chief Financial Officer
Debbie Clifford
said. The rate increases could make it harder for the company’s customers, which are concentrated in the architecture, engineering, construction, manufacturing and media industries, to execute on their projects, she said. For example, Autodesk’s manufacturing customers would likely face higher materials costs from the possible hikes, she said.
“It’s just another data point for us to be looking at as we think about this world of rising interest rates and what the potential might be in terms of the impact on our customers,” Ms. Clifford said. Autodesk is otherwise insulated from rate increases because it has minimal capital expenditures and no near-term financing needs, Ms. Clifford said.
For wholesale retailer
Costco Wholesale Corp.
, which is known for selling discounted bulk goods to paying members, pressure on consumers’ spending may in some ways be a benefit, according to Chief Financial Officer
Richard Galanti.
Costco’s markup on goods is in the low teens compared with traditional retailers, where it can be anywhere from 25% to 50% or more, Mr. Galanti said. “Perhaps it creates an opportunity that they’re looking to save more money,” he said of consumers. “Some suggest we do well in both good and bad times because of that.”
—Mark Maurer contributed to this article.
Write to Jennifer Williams-Alvarez at jennifer.williams-alvarez@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8