Warsh Leaves Next Rate Decision Open
Federal Reserve Chair Kevin Warsh declined on Friday to signal whether interest rates will rise again at the October or December meetings, while reaffirming the commitment to price stability. Speaking at the IMF and World Bank meetings in Bangkok, he left the next decision open after September’s quarter-point increase. For the Fly High universe, that leaves an important distinction: the absence of a fresh tightening signal is welcome, but it has not reduced anyone’s interest bill.
The Fed’s September decision raised its target range to 3.75% to 4%. Its published minutes show that most participants thought another increase would probably be appropriate by year-end, although future decisions would depend on incoming information. Warsh’s overnight remarks do not overturn that position or promise a pause. They leave room to assess the economy before adding another increase in financing costs.
For business development companies, which lend to private businesses, that room has two sides. Loans with floating interest rates can continue producing relatively high income while rates stay elevated, but borrowers must earn enough after their operating expenses to make those payments. A higher contractual loan rate is useful only when the interest can be collected. Meanwhile, a lender’s own debt may reprice at a different time or remain fixed, so unchanged Fed policy does not guarantee an unchanged margin between interest earned and financing costs.
Property companies face a similar timing issue because existing fixed-rate debt can delay the effect of higher borrowing costs until refinancing. Mortgage real estate investment trusts also depend on the difference between investment income and funding costs, with hedges affecting how quickly rate changes reach earnings. A policy pause would not automatically lower those costs, and a change in bond values would not by itself establish stronger dividend support.
We welcome the willingness to leave the next decision open because another immediate increase would add pressure where borrowers are already carrying expensive debt. But our view remains that actual financing costs and cash interest received deserve more weight than relief about the tone of a speech. Evidence of cheaper refinancing alongside steady borrower payments would justify a more favorable judgment on earning power and dividend support. Until then, confidence in dividends must rest on demonstrated earnings.
Sources
- Associated Press: Warsh’s October 16 remarks in Bangkok
- Anadolu footage and account of the October 16 discussion, via Reuters Connect
- Federal Reserve: September 16 policy decision
- Federal Reserve: September 15-16 meeting minutes
This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.