Various Credit Events Would Cause The Fed To Lower Rates in the Near Term
How high do High Yield spreads need to climb before the Fed lowers rates?
It does not work like that. Typically the Fed will lower its Fed Funds rate due to a credit event, then High Yield spreads will widen to peak levels before trending back downward (see chart below, Fed Funds rate in RED, High Yield spreads in GREEN).
What type of credit event could serve as a catalyst for the Fed to lower its Fed Funds rate?
If High Yield bond issuance was to dramatically fall, it would cause the Fed to lower its Fed Funds rate. July High Yield issuance was in-line with June, which was down from March, April and May’s pace. Let’s see how August High Yield issuance plays out. If it grinds to a halt, the Fed almost certainly will lower rates this month.
If the rating agencies were to re-rate credits as they should be rated (i.e. downgrade credits) en masse, the Fed would likely step in and backstop the credit market. The Federal Reserve at this juncture is little more than a Centralized Bailout institution. This was not the case prior to 2008 - the pivot point when the Fed essentially nationalized the U.S. credit market.