When the Fed raised rates on September 16th, its first hike in more than three years, a lot of confident forecasts took a hit. A few of ours were among them.
Stories tend to linger on the ordeal, but the hero’s journey saves its real reckoning for the road back. This stretch is where the hero finally has time to sort out which lessons are really worth carrying home.
Consider this our road back. It starts with an honest scoring of our recent calls, runs through what drove the hike and what it means for bonds and bank lending, and ends with why none of it shook the case for factoring.
Checking Our Own Calls
In August, we flagged that markets were pricing real odds of another rate hike, with a more hawkish Fed guarding against inflation that wouldn’t settle. That call held when the Fed raised rates a quarter point to a range of 3.75% to 4% on a 12-0 vote.
Our larger view has fared a bit worse. Twice, we said long-term rates were likely to come down and that cheaper capital and thinner spreads looked like the setup ahead. Instead, the 10-year Treasury pushed past 5% the week the Fed moved, and the country’s largest banks lifted their prime rate to 7% effective the next morning.
We were early on long rates at best, and simply wrong that cheaper capital was around the corner.
We also underestimated how long oil would keep inflation running hot. The conflict with Iran has kept energy prices high enough that consumer inflation ran at 3.4% for the year through August, well above the Fed’s target and showing little sign of cooling.
Warsh acknowledged that the Fed has no real way to cut off the main source of the problem. The Fed hiked anyway, and 16 of its 18 officials expect at least one more increase this year.
Plenty of careful observers think a rate hike is the wrong tool for this particular fire. Higher rates have no direct line to oil prices, and some argue the damage runs deeper, since holding rates high chokes off new housing construction and ends up propping up the very prices the Fed is trying to bring down.
Where Bonds Meet Banks
The long end of the bond market has drawn most of the alarm this year, but some of it misreads the risk.
Some prominent investors have warned that U.S. debt is heading toward a crisis, though plenty of bond strategists argue that default is the wrong fear for a country that borrows in its own currency. The real exposure is to inflation, and it isn’t spread evenly across the curve.
Run the numbers and a one-point rise in rates would leave a 30-year Treasury down about 10.7% even after a year of interest. Bonds five years and shorter hold up far better, earning enough in a year to absorb a move that size.
Some analysts point to a structural wrinkle as well. In their view, the biggest marginal buyers of long bonds today are passive index funds, which buy in proportion to market value. As a result, the deeply discounted bonds issued during the zero-rate years draw less demand exactly when they look cheapest.
By that logic, the selloff says more about who’s buying than about U.S. credit. The market’s own gauges of default risk haven’t flashed the warnings the headlines suggest.
For commercial banks, the hike lands in two places at once. Anything priced off prime, from credit card balances to many small-business lines, reprices within a billing cycle or two, so banks earn more on floating-rate loans almost immediately.
Higher long yields also deepen the paper losses on the bond portfolios banks already carry, and new lending slows. When banks do tighten, they start with smaller and riskier borrowers.
Why Factoring Holds
Factoring runs on something the Fed doesn’t control. The question underneath every deal is whether a real customer will pay a real invoice for work that’s already been done. No rate decision sets that answer.
Higher rates do raise a factor’s own cost of funds, and we won’t pretend that’s painless. However, the same squeeze works in the other direction on demand.
When banks tighten, they pull back first from the small and mid-size companies that need working capital most, and those companies go looking for it elsewhere. Turbulence in commercial banking has a way of sending good businesses toward factors.
Whichever way this month’s fight over AI resolves, it points back to the same fundamentals. After reports of AI systems acting outside what their builders intended, several of the largest labs agreed to slow development, and the industry split over whether to pace the frontier or race China for it.
Some skeptics suspect the labs have no real moats and are looking at regulation as a way to build one. If they’re right and the models become commodities, the edge goes to whoever best understands the work the tools are pointed at. In factoring, that means knowing which red flags are real and which deals are worth doing.
Every factor knows the discipline of reconciling a ledger, matching what you expected to collect against what actually came in. We predicted cheaper capital and got a hike instead, yet the fundamentals we underwrite on held up anyway.
The Journey Back
Every road back ends with the hero deciding what to carry home. We’re bringing back a healthier respect for how quickly a supply shock can override a rate forecast, along with a clearer view of who pays when banks tighten and where those borrowers turn next. Underneath both sits the question we underwrite every deal on, and a hiking cycle didn’t change the answer.
We’ll keep making calls here, because a newsletter that never commits to a view isn’t much use to anyone, and we’ll keep checking them in public against what actually happened.
The case for factoring came home from this stretch intact, and it’s one we’d make again tomorrow.
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