Corporate America has dodged the damage of high tariffs. For now.

The prediction was simple: a rapid rise in interest rates, orchestrated by the Federal Reserve, would limit consumer spending and corporate profits, sharply reducing the workforce and cooling a red-hot economy.

But things are not going quite as the forecasters expected. Inflation has eased, but the country’s largest companies have avoided the damage of higher interest rates. As profits rebound, companies continue to hire, giving the economy and stock market a boost that few predicted when the Fed started raising rates nearly two years ago.

There are two main reasons why large companies have avoided the hammer of higher rates. In the same way that the average interest rate on existing household mortgages is still just 3.6 percent – ​​a reflection of the millions of owners who bought or refinanced homes at the low terms that prevailed until early last year – leaders in the U.S. businesses sought cheap financing in the bond market before interest rates started to rise.

When the Fed pushed interest rates above 5 percent, from near zero in early 2022, these companies’ financial officers began diverting the excess cash into investments that generated higher interest income.

The combination meant that net interest payments – the money owed on debt, minus income from interest-bearing investments – for US companies fell to $136.8 billion at the end of September. It was a low not seen since the 1980s, data from the Bureau of Economic Analysis showed.

That could change quickly.

While many small businesses and some risky corporate borrowers have already seen interest costs rise, the largest companies will face a sharp increase in borrowing costs in the coming years if interest rates don’t start falling. That’s because a wave of debt is coming to the corporate bond and loan markets over the next two years, and companies will likely have to refinance those loans at higher interest rates.

The junk bond market is facing a ‘refinancing wall’.

About a third of the $1.3 trillion in debt issued by companies in the so-called junk bond market, where the riskiest borrowers fund their operations, will be paid off in the next three years, according to Bank of America research.

The average “coupon” or interest rate on bonds sold by these borrowers is about 6 percent. But according to an index from ICE Data Services, it would cost companies almost 9 percent to borrow today.

Credit analysts and investors acknowledge they are uncertain whether the eventual damage will be manageable or enough to worsen a downturn in the economy. The severity of the impact will largely depend on how long interest rates remain high.

“I think the question for people who are really concerned about it is, is this going to be the straw that breaks the camel’s back?” said Jim Caron, portfolio manager at Morgan Stanley. “Did this cause the collapse?”

The good news is that debt maturing in the junk bond market at the end of 2024 represents only about 8 percent of the outstanding market, according to data compiled by Bloomberg. Essentially, less than a tenth of the collective debt mountain needs to be refinanced in the short term. But borrowers could face higher financing costs even earlier: Junk-rated companies typically try to refinance early so they don’t have to rely on investors for last-minute financing. In any case, the longer interest rates remain high, the more companies will have to absorb higher interest costs.

Among the companies most exposed to higher interest rates are “zombies” – companies that are already unable to generate enough revenue to cover their interest payments. These companies were able to survive when interest rates were low, but higher interest rates could make them insolvent.

Even if this challenge is addressed, it could have tangible impacts on growth and employment, said Atsi Sheth, director of credit strategy at Moody’s.

“If we say the cost of their borrowing to do these things is a little bit higher now than it was two years ago,” Ms. Sheth said, more business leaders might decide, “Maybe I’ll hire fewer people. Maybe I won’t set up that factory. Maybe I’ll cut production by 10 percent. I might close a factory. Maybe I’ll fire people.”

Small businesses have a different set of problems.

Some of this potential effect is already visible elsewhere, in the vast majority of companies that do not finance themselves through the machinations of selling bonds or loans to investors in the corporate credit markets. These companies – the small, private enterprises responsible for about half of the country’s private sector employment – ​​are already having to pay much more on their debts.

They finance their operations with cash from sales, business credit cards and private loans – all more expensive options for financing payrolls and operations. According to the National Federation of Independent Business, a trade group, small and medium-sized businesses with good credit paid 4 percent for a line of credit from their bankers a few years ago. Now they pay 10 percent interest on short-term loans.

These companies’ workforces have shrunk and their credit card balances are higher than before the pandemic, even as spending has declined.

“This suggests that more and more small businesses are not paying the full balance and are using credit cards as a source of financing,” Bank of America analysts said. not yet a widespread problem.

In addition to small businesses, some vulnerable private companies that do have access to the corporate credit markets are already experiencing higher interest costs. Backed by private equity investors, who typically buy companies and load them with debt to make financial gains, these companies borrow from the leveraged lending market, where borrowing typically comes with variable interest rates that rise and fall broadly in line with the Fed’s interest rates. adjustments.

Moody’s maintains a list of companies with a negative rating of B3 or lower, a very low credit rating reserved for companies in financial distress. Nearly 80 percent of the companies on this list are private equity-backed leveraged buyouts.

Some of these borrowers have sought creative ways to extend the terms of their debts, or avoid paying interest until the economic environment improves.

Used car seller Carvana – backed by private equity giant Apollo Global Management – ​​renegotiated its debt this year to do just that, allowing management to limit losses in the third quarter, not to mention rising interest costs that it postpones.

Leaders of risky companies will be hoping that a serene mix of economic news lies ahead – with inflation falling substantially while overall economic growth remains stable, allowing Fed officials to end the rate hike cycle or even cut rates slightly .

Recent research offers some of that hope.

In September, staff economists at the Federal Reserve Bank of Chicago said published a model prediction This indicates that “inflation will return to the Fed’s target by mid-2024” without a major economic contraction. If that happens, lower interest rates could come to the rescue of companies in need of new funds much sooner than previously expected.

Few see that as a guarantee at this point, including Ms. Sheth at Moody’s.

“Companies had a lot of things in store that might run out next year,” she said.